The Office for Tax Simplification has today published its second report on simplifying inheritance tax. Laura Suter, personal finance analyst at AJ Bell, comments:
“The inheritance tax system has become so complicated that many people simply do not understand the system, so any simplification to make it easier for families to navigate would be a positive development. Recent HMRC research* found that just 45% of people gifting money knew how inheritance tax rules worked, highlighting the need for both simplified rules and more education.
“The Office for Tax Simplification’s recommendation to merge the annual gift exemption and the exemption for gifts in consideration of marriage or civil partnership into an overall personal gifts allowance is therefore a good suggestion. It has also rightly suggested the level of the allowance be reviewed. The gifting allowance hasn’t been increased for decades so inflation has dramatically eroded its value.
“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 same goes for the suggestion of removing the ability to gift money from disposable income. While this is little understood and there have never been clear guidelines on exactly how much you can gift under this rule, removing it entirely would take away a very lucrative tax break.
“The report acknowledged that the rules around IHT and pensions have created an ‘uneven playing field’, however it falls short of recommending that all pensions are exempt from inheritance tax. We’ve long called for this to be the case, as providers having discretion over who receives death benefits isn’t in keeping with the new pension freedom rules and can cause unnecessary delays and distress for people at an already difficult time.
“The new residence nil-rate band attracted the most comments in the OFT’s consultation with the public and businesses, with many branding it complex and some professionals even refusing to advise on it. However, scrapping the relief entirely would lead to a 68% increase in the number of estates paying IHT by 2023-24, while scrapping it and raising the normal nil rate band to £500,000 would cost the Government an extra £7.5bn during that time – neither feels like a workable option. There is still room for tweaking the rules to make them simpler, for example when people downsize or if childless couples want to leave their home to other family member.”