Households are being urged to review their estate planning as speculation grows that Chancellor Rachel Reeves may target a little-known inheritance tax (IHT) exemption. The rule, which allows individuals to make unlimited tax-free gifts from their surplus income, has long been seen as a valuable way to reduce future IHT bills — but it could now be under threat.

Under current HMRC rules, regular gifts that form part of someone’s normal expenditure are immediately exempt from IHT, provided they are made from income rather than savings. Donors must also ensure they keep enough income to maintain their usual standard of living.

Reports suggest the Labour Government is reviewing the provision amid wider efforts to tighten tax loopholes and raise revenue.

Sean McCann, a chartered financial planner at NFU Mutual, said: “Currently, if you make regular gifts, there’s no restriction on how much you can give away immediately free from IHT, provided it is out of your income and doesn’t impact your normal standard of living.”

He further suggested that this provision “is likely to be in the Chancellor’s sights in the forthcoming budget”, adding: “With no upper limit, it currently allows those with high incomes to give away significant sums immediately free from IHT. Many wealthy grandparents use this to pay their grandchildren’s school fees, and so the introduction of a limit or an abolition, coupled with VAT on school fees, would be a double blow. “

Mr McCann continued: “Many use the exemption to make outright gifts, put money into trust, or invest in pensions for younger members of the family. As the exemption isn’t claimed until after death, it’s important to keep records of your income, expenditure and gifts.”

“Gifts made on a regular basis, such as annually or more frequently, are more likely to satisfy the test.

“The first gift in a series can qualify even if you die shortly after making it, provided there is evidence that further regular gifts were planned.

“For this reason, it’s a good idea to send your loved ones a note with the first gift confirming your intention to gift regularly and keep a copy with your will.”