Raymond Doherty 8 Jul 2019 01:56pm

Report calls for overhaul of IHT

The Office of Tax Simplification (OTS) has proposed a significant reform of the inheritance tax system

Among the changes, it suggested that the seven-year period during which a lifetime gift may become subject to inheritance tax (IHT) is too long and should be reduced to five years. This would mean that gifts to individuals made more than five years before death are exempt.

The government-commissioned report also recommended the current taper relief system, which is applied to lifetime gifts, be abolished.

The unpopularity of IHT resulted in the OTS receiving more responses to its request for views on the tax than for any other review it has carried out.

Many of the 3,500-plus people who got in touch told the OTS how hard it was to fill in complicated forms at such a difficult and sensitive time, even when the dead relative had only left a small amount.

According to the OTS, in the 2015/16 tax year there were 588,000 deaths, while around 275,000 IHT forms were completed. Ultimately, only 24,500 estates – or less than 5% of the deaths – were liable for the tax but the forms had to be submitted because the value of the estate had to be reported to HMRC whether there was a liability or not.

IHT also makes up less than 1% of the UK’s total tax take. In 2017/18 receipts amounted to £5.2bn which, as the OTS points out, was equivalent to the cost of just over one week’s provision of UK pensions and welfare benefits during that year.

On publishing the recommendations, Bill Dodwell, OTS tax director, said, “The taxation of lifetime gifts is widely misunderstood and administratively burdensome.

“We recommend replacing the multiplicity of lifetime gift exemptions with a single personal gift allowance, to be set at a sensible level, and incorporating an increased lower threshold for small gifts. The exemption for regular gifts should be reformed or replaced with a higher personal gift allowance.

“Where there is [IHT] to pay on lifetime gifts, the OTS recommends the government explores options for simplifying and clarifying the rules on who is liable to pay this tax, and how the £325,000 threshold is allocated between different recipients,” added Dodwell.

Sue Moore, technical manager in ICAEW’s Tax Faculty, said that some of the OTS proposals are “sensible” but that others may prove controversial.

“The recommendation to combine the various gift allowances into one personal allowance is positive as many people are baffled by the various exemptions currently in place. More contentious is the suggestion that the normal expenditure out of income rules be abolished and included within a higher personal gift allowance,” she said.

“Reducing the seven year survival period for gifts to five years is a very practical solution to the problem of obtaining bank statements that are more than six years old. Taper relief is much misunderstood: the taper applies to the tax payable but most people think it applies to the value of the gift. As most lifetime giving is below the nil rate band, the taper relief doesn’t kick-in very often so abolition of this relief – combined with a reduction in the survival period to five years – would probably mean more people would win than lose.

“The recommendation to remove the capital gains tax free uplift on death where an asset qualifies for relief from IHT could, if adopted, encourage earlier gifting of businesses which may be beneficial,” added Moore.