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Inheritance Tax and Lifetime Gifts
  • 17th Jul 2019
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Following a consultation process, the Office for Tax Simplification (‘OTS’) has recommended an overhaul of the current inheritance tax rules relating to lifetime gifts. The OTS makes recommendations for the government to consider and published its report on 5 July 2019.

 

What are the current rules?

 

The taxation of lifetime gifts is widely misunderstood, with some people not realising inheritance tax may be payable on gifts made during their lifetime.  Although inheritance tax applies primarily on death, it also applies to gifts made to individuals within seven years of death and to some other lifetime gifts (such as a gift made to a trust).

 

If someone dies within seven years of the date of making a gift over their annual allowance, their executors must include the value of that gift when reporting the date of death value of the estate to HMRC and in their inheritance tax calculations.  This is known as the ‘seven year rule’.   

 

Each individual can currently give away £3,000 per tax year, without the seven year rule applying.  This is known as the annual gift exemption.  There are also exemptions relating to gifts out of excess income, small gifts, gifts on marriage/civil partnership and gifts to charities and political parties. 

 

Sometimes, if the gift has been sufficiently large and at least three years have elapsed since the date of making the gift, taper relief can be applied. Taper relief is calculated by reference to a sliding scale and determined by how many years have elapsed. 

 

What are the proposed changes?

 

The report contains multiple recommendations, which the OTS say will “deliver a more coherent and understandable structure of the tax”.

 

One of its main proposals is to reduce the ‘seven year rule’ to five years. One of the reasons for this is that statements covering this long timeframe cannot be easily obtained from banks and building societies by executors. 

 

Another suggestion is to replace the exemptions (such as the annual gift exemption) with an overall personal gift allowance, although they have not suggested an amount for this allowance.  The £3,000 annual gift exemption has remained the same since the 1980s so many would say an increase is long overdue.

 

They have also suggested that taper relief be removed altogether.

 

The full report can be found at: https://www.gov.uk/government/publications/ots-inheritance-tax-review-simplifying-the-design-of-the-tax

 

Comment

 

The current rules are often described as complex and confusing and therefore the proposed changes are a good start but arguably the changes proposed do not go far enough.  Even if these changes our implemented, England and Wales’ inheritance tax regime will remain rather complex.  It is a shame that the OTS has focused on the inheritance tax rules in relation to lifetime gifts and although discussed in the report,  has not put forward any proposals in relation to the inheritance tax nil-rate band, the residence nil-rate band or the treatment of trusts as part of this review.

 

If you are worried about inheritance tax and need help understanding the current rules, please contact our Tax and Estate Planning specialists.