Rachel Reeves alerted inheritance tax raid could choke off lifeline for young families

Rachel Reeves is facing demands not to clamp down on tax-free family gifts, with warnings it would deprive young households of vital support at a time of soaring costs. New research reveals pensioners typically give away around 10% of their income - almost £2,500 a year - to children and grandchildren.

The money goes directly to cover living costs, or towards essentials such as education. The findings, from wealth manager Quilter and the Centre for Economics and Business Research, underline the risk of an inheritance tax grab on lifetime gifts - said to be one of the measures the Chancellor is weighing up to help fill the black hole in Britain's finances. Rachael Griffin of Quilter said: "There's a strong economic case for supporting the transfer of wealth between generations.

"Younger people face significant financial pressures, from high housing costs to childcare and limited pension savings, while older generations often hold substantial assets. Sensible rules help to unlock this capital at the right time." Currently, people can give away unlimited sums provided they survive for seven years after making the gift.

Reports suggest Ms Reeves is looking at imposing a lifetime cap, though no details have been published. Critics argue the Chancellor should instead loosen the rules.

Ms Griffin added that the £3,000 annual gifting exemption - unchanged for more than 40 years - should be tripled to £9,000 to reflect modern costs. Gary Smith of Evelyn Partners told the Times: "The patchwork of gifting rules is quite complicated and outdated, and there was some expectation before the last budget that there could be a crackdown on gifting under the auspices of simplification.

"The annual gifting limits, which allow smaller gifts that will never be subject to inheritance tax, are very modest, having been frozen for more than four decades, so they no longer afford much protection." Quilter's survey of 5,000 retired people found average outgoings of £22,140 a year - far short of the £31,300 a year the industry body Pensions UK says is needed for a "moderate" retirement.

Some 18% admitted they were "very concerned" about maintaining living standards, particularly those under 65, while the over-80s relied on the state pension for half their income. Quilter's chief executive Steven Levin said: "These people aren't just budgeting for themselves; they're quietly propping up the next generation too.

"With nearly £2,500 a year being gifted to family and education, it's clear that many are playing a bigger economic role than they are often given credit for." The Treasury refuses to comment on what might be included in the autumn budget.

It said the government's priority is "keeping taxes for working people as low as possible".

It added: "This is why at last autumn's budget we protected working people's payslips and kept our promise not to raise the basic, higher or additional rates of income tax, employee national insurance or VAT."