Rachel Reeves set to scrap £60k tax loophole in Budget in yet another blow to Brits. (Image: Getty)

Rachel Reeves is reportedly preparing to scrap a key tax exemption in her upcoming Budget, delivering another financial blow to families.

The “normal expenditure out of income” exemption allows individuals to give away unlimited amounts of money without paying inheritance tax, provided the gifts come from regular income and do not lower the donor’s living standards.

This little-known loophole has enabled some families to make substantial savings.

According to information obtained by The Telegraph, nearly 500 individuals used the exemption to give away £74 million tax-free during their lifetimes, saving around £60,000 each in inheritance tax.

The figures were valid as of 2021-2022, which is the latest year for which HMRC has complete data.

However, wealth managers and tax experts believe the exemption is unlikely to survive under a Labour government, with many speculating that it will be scrapped in next week’s Budget.

James Ward of Kingsley Napley said: “I would be surprised if it remains intact in its current format after the next few budgets.”

However, Andy Butcher of Raymond James pointed out that the exemption is mainly used by the very wealthy, as it requires excess income rather than capital to qualify.

Reeves is expected to make significant tax changes in the upcoming Budget, with some reports suggesting tax hikes of up to £35 billion.

Reeves is expected to make significant tax changes in the upcoming Budget. (Image: Getty)

A 2019 report by the now-disbanded Office of Tax Simplification (OTS) recommended overhauling inheritance tax rules, including abolishing the “normal expenditure” rule and replacing it with a personal gift allowance.

The report’s authors acknowledged that such changes would create “winners and losers,” with those using the exemption for large gifts potentially paying more inheritance tax.

Sean McCann of NFU Mutual said that abolishing the exemption could be particularly harmful for families contributing to their grandchildren’s school fees, especially if it is combined with a VAT on school fees, describing the potential change as a “double blow.”

Wealth managers are already seeing families rushing to bring forward gifts to avoid any changes to inheritance tax under Labour.

Inheritance tax is currently raising record revenues for the Government due to frozen tax thresholds, with receipts rising 10 percent to £4.3 billion in the first half of the financial year.

A Treasury spokesperson declined to comment on the potential changes, saying: “We do not comment on speculation around tax changes outside of fiscal events.”