We welcome news that the Office of Tax Simplification wants to make changes to the system governing inheritance tax.
The Office of Tax Simplification – OTS – suggests the deadline for when inheritance is paid should be reduced. At the moment, when someone dies within seven years of handing over money, property or possessions to loved ones, tax of up to 40% must be paid if the value is over a certain amount.
The OTS wants this deadline reduced to five years and also wants the whole system to be made much simpler.
It is now up to the Treasury to approve these changes and we’d urge it to do so, because they will have a significant and beneficial impact on those planning for their older age.
This is a tax that is paid to the government on the estate of a deceased person. The first £325,00 is exempt and anything above this threshold which is left to a spouse, civil partner, charity or community amateur sports club is also not liable to the tax.
Fewer than 25,000 estates are liable for the tax each year – the equivalent of 5% of all deaths – but forms need to be completed on behalf of many more estates to check whether they are liable. This is a burden that falls on estate executors, who are often grieving loved ones.
The OTS’s review is a result of a request by Chancellor Philip Hammond to look into the whole system.
Kathryn Cearns, who chairs the OTS, said: “Although only a small number of people pay inheritance tax each year, a far greater number worry about it. The OTS’s packages of recommendations would go some way to achieving the goal of making the tax easier to understand and simpler to comply with.”
The rules around making gifts, as they stand, are complex. There’s usually no IHT (inheritance tax) to pay on small gifts you make out of your normal income, such as Christmas or birthday presents. These are known as ‘exempted gifts’.
Similarly, there is no IHT to pay on gifts between spouses or civil partners. You can give them as much as you like during your lifetime, as long as they live in the UK permanently.
Anyone can give away £3,000 worth of gifts each tax year without them being added to the value of the estate. If unused, this allowance can be carried over to the following year, up to a maximum of £6,000.
Each tax year, you can also give away:
The OTS is proposing this range is scrapped and replaced with a single, higher, annual gift allowance.
Usually it is the estate which is liable for inheritance tax. However, a recipient of a gift, if the giver has died within seven years, and has already given away more than £325,000, could be liable to pay inheritance tax. The OTS wants to cut this seven years to five.
The Treasury, which commissioned the report, said it would “consider the OTS recommendations carefully and will respond in due course”.
Let’s hope it comes to a speedy conclusion and adopts the OTS’s advice.
In the meantime, if you think your estate may be liable to inheritance tax there are ways to reduce the burden, through trusts and also through gifting. Why not get in touch with the legal team here at Optimum for some expert advice?