Inheritance tax to be made “simpler, more intuitive and easier to operate”

The Office for Tax Simplification (OTS) has published its second opinion on Inheritance Tax (IHT) and how it can be made “simpler, more intuitive and easier to operate”.

The report comes after the Government asked the department to simplify the complexity of IHT, following concerns that many people had a “limited understanding” about the way the tax works.

The new report contains 11 recommendations, four of which are likely to have a cost to the exchequer or to the public. These relate to:

  • The taxation of lifetime gifts
  • Looking at who pays tax where lifetime gifts are taxable
  • Simpler exemptions for lifetime gifts; and
  • A review of business exemptions to ensure they are focused on the policy goals and are consistent across different taxes.

Among these changes, the OTS recommends stripping away the multiplicity of lifetime gift exemptions and replacing them with a single personal gift allowance.  It also recommends removing the seven-year tapered rate of inheritance tax on gifts, replacing it with a five-year, fixed-rate charge. This recommendation comes after research revealed that the tax paid on gifts six or seven years before death is nominal.

Commenting on the change, 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.

“We recommend that the 7-year period be shortened to 5 years (significantly reducing the workload on executors), and abolishing the tapered rate of Inheritance Tax (which many find works in a counter-intuitive way). Data made public for the first time shows the tax paid on gifts 6 or 7 years before death is low.

“Where there is Inheritance Tax 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.”

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