The Office of Tax Simplification (OTS) is the independent adviser to government on simplifying the UK tax system, to make it easier for the taxpayer. The OTS makes recommendations for the government to consider. It does not implement changes – these are a matter for government and for parliament.

A review of Inheritance Tax was requested by the Chancellor in January 2018. Following a consultation process which generated an unprecedented level of interest – and made it clear that many people had limited understanding about the way Inheritance Tax works – this report explores the design complexities of the tax.

Inheritance Tax applies primarily on death, but also to gifts made to individuals within 7 years of death and to lifetime gifts other than to individuals, charities and qualifying political parties.

The report contains 11 recommendations to deliver a more coherent and understandable structure of the tax. Four main areas are grouped as packages, where some elements have an Exchequer cost and others raise money. They are: 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.

Lifetime gifts

There are several exemptions from Inheritance Tax relating to lifetime gifts, which haven’t changed since the 1980s. These are exemptions for the first £3,000 given away each year, for individual gifts of up to £250, gifts to someone getting married or entering a civil partnership and regular gifts out of a person’s disposable income.

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.

Capital Gains tax, businesses and farms

The OTS consultation highlighted complexity in the interaction between Inheritance Tax and Capital Gains Tax, as well as in relation to the reliefs available for businesses and farms. Aspects of the regime distort the decisions families face when passing assets to the next generation, where there are different tests applying to what is broadly the same activity. The report makes recommendations to address these distortions and reduce complexity and asks the government to consider whether the reliefs are targeted most effectively at the policy objectives.

The report contains newly published HMRC data to inform the public about some of the costs and trade-offs inherent in the design of Inheritance Tax.

Kathryn Cearns, OBE, OTS Chairman said:

Although only a small number of people pay Inheritance Tax each year, a far greater number worry about it. The OTS’s packages of recommendations would go some way to achieving the goal of making the tax easier to understand and simpler to comply with.”

The report can be read in full here: IHT Report

If you have any questions about Inheritance Tax please call the team at Vincent & Co on 01803 500500 and we will advise you.