A recent report by the Office of Tax Simplification (OTS) contains a number of recommendations to deliver “a more coherent and understandable structure” to inheritance tax. These recommendations have been put to the government to consider and have not yet been acted upon but it does certainly highlight scope for change to the current rules that are complex and often misunderstood.
The primary suggested area for reform is the taxation of lifetime gifts. Generally speaking, any gifts made by an individual over £3,000 in any one tax year within the last 7 years of their life will fall back into their estate for tax purposes on their death. The OTS recommends that this 7 year period is shortened to 5 years. On the face of it this is a welcome proposal resulting in any gift (no matter the size) falling completely outside of the estate on death for tax purposes provided at least 5 years existed between the date of the gift and date of death.
However, this change would come with the removal of “taper relief”. Taper relief applies where the gift was made more than 3 years but less than 7 years before the date of death. If inheritance tax is due on such a gift the effective rate of tax (usually 40%) is reduced, in line with the number of years the transferor survived the gift. For example, the effective rate of tax on a lifetime gift survived by 4 years is 24%. The proposed reforms would do away with taper relief meaning the standard rate of 40% would apply to any taxable gift not survived by 5 years.
The report also suggests a simplification of the many existing lifetime gift exemptions with a single personal gift allowance. Many people are aware of the annual gift allowance of £3,000 but other exemptions exist including:
The simplification of these numerous exemptions is likely to be welcomed by many looking to engage in estate and inheritance tax planning exercises in the future. Unfortunately, for the time being, at least, individuals and professionals alike must continue to navigate the existing multifaceted rules.
If you wish to discuss your own inheritance tax position or look at planning methods to mitigate your potential liability, please get in touch with our Private Client team on 0330 0945 500, email firstname.lastname@example.org or complete our Contact Form and we'll get back to you.