Please note that the changes discussed in this blog are just proposals, not the current law, and may never be implemented.
The Office of Tax Simplification (OTS) has proposed several changes to the rules surrounding inheritance gift giving before death. One of these is reducing the number of years before a gift is exempt from Inheritance Tax (IHT) from seven to five.
According to the current rules, any estate gifted within seven years of the donor dying is liable to be included in an IHT bill. A sliding scale is introduced after the first three years, where the tax charge drops from 40% to 32%. If the donor is still alive eight years after the gift has been given, no tax is charged.
The proposed changes were suggested because the seven year scale can cause several issues. For example, bank statements can only be backdated by up to six years, which makes tracking gifts difficult for executors.
The OTS’s suggestions may also have little effect on IHT contributions. The OTS reported that in 2015/16, only £7 million – out of the total £4.38 billion in IHT receipts – was accrued from gifts made more than five years before donors’ deaths. Furthermore, the changes may help to minimise administrative tasks within HMRC, therefore saving valuable resources.
The OTS has also proposed reviewing the system used to track IHT-exempt gifts. The recommendations show that the many ways in which a gift can be exempt are confusing and outdated.
One example of this is the rule surrounding the annual gift allowance. When it was first created in the 1980s, a gift of £3,000 could be given every year, tax-free. According to inflation rates, this figure would now exceed £11,900 in the current market, yet the allowance hasn’t increased.
The OTS’s report suggests creating an overall personal gift allowance that would be exempt from IHT if the donor dies within five years of making their gift. It is hoped that this system would simplify record-keeping, which could reduce delays in determining IHT contributions.
Inheritance Tax can be complex and confusing, but with careful planning, you could stop your family losing out on your legacy. Our Tax Planning Report service looks at your situation to see where you could legally save money.
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