Inheritance tax and gifting – are we going to see a major change to the rules?

NOTE: This post is more than 12 months old, and the information contained within may no longer be accurate.

The Office for Tax Simplification (OTS) has published its second report into inheritance tax (IHT). The independent report ordered by the chancellor has, amongst other things, called for a major shake-up of the rules around gifting money.

To simplify the complexity of current gifting rules, which it says few people understand, the OTS recommends that a individuals should have a personal gift allowance. The personal allowance would replaces the annual gift exemption and the exemption for normal expenditure out of income, which is often misunderstood and requires detailed records being kept. However the OTS gives no suggestion to the value of this personal gift allowance. Currently individuals can give away £3,000 a year and unlimited gifts of under £250 to other people without potentially paying IHT. Parents can give £5,000 towards the cost of a child’s wedding and grandparents £2,500. But these allowances have not changed since the 1980s, and the report pointed out that had the £3,000 annual exemption risen in line with inflation it would now be £11,900.

The OTS also proposes changes to the 7 year rule. At the moment assets given away during an individual’s lifetime are exempt from IHT if the person lives for 7 years. The OTS says this should be reduced to 5 years, which would remove the difficulties for executers of finding bank statements going back more than 6 years. In addition, it recommended that taper relief should be abolished, and that all gifts more than 5 years before death should be ignored when calculating the IHT on death. Currently gifts made 14 years prior to death could impacting on the estate tax.

The OTS calculations show that ”in 2015-16, only £7 million out of total IHT of £4.38 billion related to gifts to individuals made more than 5 years before death”. So taper relief abolition would appear to have little impact on the Treasury, however it would also lead to an ability to give away (to individuals or into trust) an amount equal to a person’s nil rate band (£325,000) every 5 years without a charge to Inheritance Tax, rather than every 7 years.

Other changes include IHT due on lifetime gifts to be payable by the estate rather than the recipient, and that the nil rate band should be allocated proportionately across all gifts on death with any balance being available to the estate. Currently the nil rate band is allocated to the earliest gift first. Not only can this create unintended inequality between beneficiaries as some unexpectedly benefit from the nil rate band while others don’t, it can lead to situations where gift recipients have spent the funds given to them but then find themselves liable for IHT. These appear to be sensible suggestions but they could lead to further complications, such as in establishing IHT payable on certain immediately chargeable lifetime transfers such as transfers into trust, as well as the amount of ’10 year charges’ and exit charges payable by the trust.

While the concept of making gifts is a very simple one, tax reliefs and exemptions in relation to them are certainly not. IHT receipts continue to rise and any changes that increase the tax take, whether intentionally or not, would not be popular. Is there the political will currently to see these reforms through? There is no obligation for the government to follow any of the OTS recommendations.  The Treasury has said that it will comment in due course.

For help on inheritance tax mitigation speak to one of our Chartered Financial Planners.

Contact the Author

Ian, a Chartered Financial Planner, joined Wingate in 2018 with over 30 years of experience. He specialises in advising clients approaching or in retirement, focusing on pensions, investments, Inheritance Tax Planning, and Long-Term Care. Ian is a member of the Personal Finance Society and the Chartered Insurance Institute.

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