Inheritance Tax Faces a Fundamental but Interesting Change

Under proposed changes to the inheritance tax, the current rules on gift-giving could be cut down from seven years to five.

A review of the system ordered by chancellor Philip Hammond claimed the period in which executors are required to account for gifts given within seven years of death should be reduced to five.

The Office of Tax Simplification (OTS) has proposed the changes, but some tax experts say another suggested change linked to this would increase tax for some people.

The OTS has proposed changes to streamline this system, which currently requires the maximum 40 per cent charge on gifts given three years before death, and a sliding scale known as tapering relief if it is between three and seven years.

Under its proposal, gifts given more than five years before death would be exempt, although with the caveat that it may reduce government revenue.

It also suggested scrapping taper relief, meaning the full 40 per cent tax would be required up to five years, creating a “cliff edge” where one day would make the difference between paying 40 per cent and nothing at all.

Another proposal came in the form of scrapping the various gift exemptions in favour of a “single personal gift allowance”, meaning an individual could gift up to a fixed amount each year.

It would mean the end of the annual exemption, which allows £3,000 worth of gifts to be given away each year without being added to the estate value.

The OTS tax director, Bill Dodwell, called for a single allowance to be set “at a sensible level”.

While the current seven-year rule and taper relief could be said to be complex (mainly by the financial press looking for headline grabbing stories it has to be said) the suggestion of reducing the seven years down to five and scrapping taper relief entirely looks like the usual ‘simplification means more tax’ story.