Inheritance tax: government advised to reduce gift rule from seven to five years
The government’s independent tax adviser has undertaken an inheritance tax review requested by the Chancellor and offered recommendations on how to simplify it.
In their report, the OTS (Office of Tax Simplification) made 11 such recommendations, including:
- Reduce the seven-year gift rule to five years
- Replace multiple forms of lifetime gifts with a single personal gift allowance and clarify who is liable for tax on lifetime gifts
- Simplify and clarify the interaction between inheritance tax and capital gains tax (CGT)
OTS President Kathryn Cearns, OBE said: âAlthough only a small number of people pay inheritance tax each year, many more are concerned.
âThe OTS sets of recommendations would go some way towards achieving the goal of making the tax easier to understand and comply with. “
The OTS recommendations have received largely positive feedback from the accounting industry, but some of the potential changes will remain controversial.
Sue Moore, Technical Head of Taxation at ICAEW (Institute of Chartered Accountants of England and Wales) and James Ward, Head of Private Client Team at Kingsley Napley LLP, reviewed each key recommendation in detail.
Speaking about the report as a whole, Sue Moore said, âThe estate tax system is a complex area for professional accountants, let alone grieving families, and the piecemeal additions to the original 1980s legislation make it so. more confusing.
“The OTS has made some sensible proposals to simplify the system, although some are controversial.”
James Ward said: âOverall, while some of the changes proposed by the OTS are welcome and reasonable, some – like the proposal to remove the excess income exemption and the increase in base cost in the event death – will see tax mitigation tools removed for high net worth clients.
âHowever, reducing the seven-year donation rule trumps everything and will make donating a little easier (either to survive or to insure).
Recommendation: Reduce the donation rule from seven years to five years
Sue Moore (ICAEW): âReducing the survival period from seven years for gifts to five years is a very practical solution to the problem of getting bank statements older than six years.
âTiered relief is very poorly understood: Tiered relief applies to tax payable, but most people think it applies to the value of the donation.
âSince most lifetime donations are below the zero-rate range, the phase-in relief does not come in very often, so abolishing this relief – combined with a reduction in the survival period to five years – would mean probably more people would win than lose. “
James Ward (Kingsley Napley LLP): âIt is clear that the salient proposal from the Office of Tax Simplification (OTS) must be to reduce the seven-year rule on donations to five years. It is a welcome proposition.
“However, this is accompanied by the removal of phase-in relief, which means that substantial donations will not benefit from any tax deduction after three years and will have to have a full five-year survival rate to receive any benefit. tax.”
Recommendation: Replace multiple forms of lifetime gifts with a single personal gift allowance
Sue Moore (ICAEW): âThe recommendation to combine the different gift allowances into one personal allowance is positive, as many people are confused by the different exemptions currently in place.
“More controversial is the suggestion that the normal non-income spending rules be abolished and included in a higher personal gifts allowance.”
James Ward (Kingsley Napley LLP): âThe OTS is also proposing to change the general exemptions for gifts and put them all together in one jar. This would result in a large annual exemption from capital donations, which makes perfect sense.
âThe sting in the tail, however, is the proposal to remove excess income donations after deducting normal expenses.
âIt’s not widely used or even known, but for high income people it can be a way to pass on a substantial amount of money without running the risk of dying within seven years.
“High incomes should now seek to give such freebies, because if this proposal is followed, this exemption will be removed.”
Recommendation: Simplify and clarify the interaction between inheritance tax and capital gains tax (CGT)
Sue Moore (ICAEW): âThe recommendation to abolish the free increase in capital gains tax (CGT) in the event of death when an asset is eligible for exemption from inheritance tax (IHT) could, if adopted, encourage earlier donations from businesses, which can be beneficial.
âMany business leaders postpone donating their business to their children for fear of losing the free CGT premium in the event of death.
âHowever, ruling out raising the CGT when the spouse’s exemption is claimed seems unfair because the tax authorities will receive their share of the IHT on the death of the surviving spouse.
âThere are some areas that require further thought: Transferring the tax payable on lifetime gifts payable after the death of the donation beneficiary to the estate could be difficult if the estate is left to another beneficiary. “
James Ward (Kingsley Napley LLP): “This is the proposal to abolish the increase in the basic cost of capital gains tax on death when there is no inheritance tax payable on the asset.
âHow it works is if a husband were to die and leave an apartment for his wife to rent, there is no inheritance tax due to the spouse’s exemption.
âHowever, there is an increase in the capital gains tax so that the wife can then sell the property if she wishes using the value of the date of death as the base cost.
âThe proposed changes mean that the apartment for rent would not have an increase in the probate value and that there would be a capital gains tax bill based on the costs of acquiring the husband and not on the value on the date of his death.
“This removes a particularly strong planning area and would also allow HMRC to collect more capital gains and make it more difficult to sell real estate without a substantial capital gains tax bill.”
Sue Moore (ICAEW): âThe UK government now collects over Â£ 5 billion from IHT, up from around Â£ 0.5 billion in 1980, so this is a growing tax affecting more and more people. people. However, only about 5% of deaths result in payment for IHT, so more people worry about IHT than they actually have to pay for it.
James Ward (Kingsley Napley LLP): âOf course, if we see a Labor government led by Corbyn, this thoughtful document can quickly look like chairs moving around the Titanic.
âThe inheritance tax, as we know it, would most likely change completely with the introduction of a punitive tax on lifelong gifts. It would block the intergenerational gift that has become so vital for the younger generation. “
The OTS is the government’s independent adviser on the simplification of the UK tax system. The OTS makes recommendations to the government. It does not implement changes – these are the responsibility of government and parliament.