A simpler approach to Inheritance Tax?

August 20th, 2019

In July the Office of Tax Simplification (OTS) issued their second report reviewing Inheritance Tax (IHT), looking at simplifying the design of the tax. This report was then laid before Parliament by the Chancellor of the Exchequer.

The OTS is the independent advisory body to government on simplifying the UK tax system, to make it easier for the taxpayer. The OTS makes recommendations for the government to consider. It does not implement changes – any changes to IHT or any part of the wider tax system are the prerogative of the government and parliament.

IHT applies primarily on death, but also to gifts made to individuals within 7 years of death and to lifetime gifts, although there are several exemptions from IHT relating to lifetime gifts. A lot of attention in the OTS report was given to the taxation of lifetime gifts. They stated that the taxation of lifetime gifts is widely misunderstood and administratively burdensome – and recommended replacing the existing multiplicity of lifetime gifts with a single personal gift allowance.

They also recommended that the 7 year period be shortened to 5 years and abolishing the tapered rate of IHT. Their data revealed that the tax paid on gifts 6 or 7 years before death is low.

Another recommendation was that life assurance policies shouldn’t need to be written in trust to avoid IHT.

The opposition parties have also been taking an interest in IHT. The Labour Party commissioned a report recently that included reference to inheritance tax – that it should be abolished and replaced with a lifetime gifts tax levied on the recipient. The report contains proposals to the party to consider as part of its policy development process.

Coming back to the OTS report, they concluded that their package of recommendations would go some way to achieving the goal of making IHT easier to understand and comply with.