OTS suggests 5-year IHT gifting period and abolition of taper relief, amongst others
10 July 2019
Reduction of the seven-year inheritance tax gifting rule to five years was one of several changes suggested by an independent review ordered by Chancellor Phillip Hammond.
In an effort to simplify the existing inheritance tax rules, The Office of Tax Simplification has suggested that gifts to individuals made more than five years before death be exempt from IHT and that taper relief, which affects gifts made within three to seven years of death, be abolished.
The recommendation formed part of a proposed shake-up of gifting rules, including taking into account gifts made outside of the seven-year period under what is known as the ’14 year rule.’ In its recommendation, the OTS said the government “should explore options for simplifying and clarifying the rules on liability for the payment of tax on lifetime gifts and the allocation of the nil rate band.”
Commenting on the report, Neil Jones, wealth and tax specialist at Canada Life, said: “The rules around gifting are ripe for review. One recommendation is to cut the seven year rule down to five. This would obviously help more clients. Getting rid of taper relief will be welcomed by many, as it’s extremely confusing even for many professionals.”
However, Laura Suter, personal finance analyst at AJ Bell, warned that the OTS gifting recommendations appeared to be a ‘tax grab’.
“The OTS rightly acknowledges that the seven-year taper rule is hideously complex and can cause people to be landed with an unexpected inheritance tax bill years after they were gifted money. However, the suggestion of reducing the seven years down to five and scrapping taper relief entirely looks like a bald tax grab and revenue-raising move. Instead the taper could be simplified into a two-step process for example, or if it’s scrapped entirely then the period should be shorter than five years.”
The review also recommended that where a relief or exemption from IHT applied, the government should consider removing the capital gains uplift. However, Rachael Griffin, tax and financial planning expert at Quilter, hailed the move as potentially creating greater intergenerational inequality.
“The OTS suggests the government get rid of the capital gains tax uplift on death. This will drastically increase the number of people who inherit things they can’t afford and means that someone who was responsible enough to buy a property and hold on to it will not be able to let their loved ones benefit fully from the growth of that property.”
Griffin added: “Again the rationale here seems sound, that the CGT uplift encourages people to hold onto assets until they die and restricts the flow of assets through generations. However, changing the rules on CGT isn’t the way to tackle this issue. If anything, it exacerbates intergenerational inequality.”
In another major overhaul to the existing rules, the OTS recommended replacing the slew of existing IHT free gift allowances with one allowance per person. While it stopped short of suggesting an exact amount, it did note that the current £3,000 annual limit would now be close to £12,000 if it had risen in line with inflation.
Griffin said bringing the allowance, which has been frozen since the early 1980s, into line with the modern day was a “no brainer.”
“It is not only fair, it will increase the flow of money through generations. Today’s personal annual gifting limit doesn’t go far, while the buying power of nearly £12,000 could make the difference when it comes to paying school fees or buying a house.
“However, it should be noted that while the OTS has observed the gifting allowance is outdated and acknowledged a need to increase they’ve ducked pinpointing the figure. They’ve merely highlighted what it would be if it was in line with inflation. An ideal approach would be to align it with the ISA allowance and index it to avoid the problem in the future.”
The report also highlighted the complexity around the main residence nil rate band, taking into consideration recommendations to scrap the allowance and increase the nil rate band. The report found the cost savings of scrapping RNRB would lead to a £51,000 increase to the nil rate band to £376,0000. This would mean that 5,370 more estates would have paid IHT by 2023-2024 than if the residence nil rate band is left as is.
However, if the nil rate band were increased to £500,000 it would have a significant effect, with some 34,4000 fewer estates paying IHT by 2024, but would cost the government coffers as much as £7.5 billion.
Canada Life’s Jones described the failure of the OTS to make a firm recommendation a “missed opportunity.”
He noted: “The report basically says it’s too early to look at the residential nil rate band – many advisers will see this as a mistake, as this area is both extremely complicated and often unfair in its application.”
With the Tory leadership battle underway, and likely to lead to a new Chancellor, Griffin warned that the recommendations could fall on deaf ears, but changes to IHT could be a “nice giveaway” for the Conservatives if and when they head into a general election.
She said: “Simplification was the name of the game for this report and that is a welcome goal. However, further tinkering to the system may do just the opposite. Before the government jump feet first into making these changes they need to step back and reflect on the purpose and vision of inheritance tax. If its purpose is to tax people based on how much wealth they have then the research is pointing to the necessity of reform. However, there needs to be proportionate reform.
“Really though this should be a cross-party initiative as rules regarding inheritance tax are, by their very nature, long term and require advanced planning. A constantly shifting framework makes such planning impossible,” she added.
The report, which marks the second and final stage of the OTS review into IHT, follows a host of recommendations on the administrative aspects of Inheritance Tax published in November last year.
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