The OTS suggests ways to simplify Inheritance Tax
Posted on Sep 05, 2019
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In January 2018, the Chancellor asked the Office of Tax Simplification (OTS) to review a wide range of administrative and technical aspects of Inheritance Tax.
Following an unprecedented level of engagement, including nearly 3,000 responses to an online survey, 500 emails from members of the public and 100 written responses to a call for evidence, the OTS published its first report in November 2018, covering the administration of tax.
Now, it has published its second report on Inheritance Tax, which explores the complexities and technical issues that arise from the way the tax works in relation to lifetime gifts, to make it both simpler and more intuitive and address distortions in the operation and scope of reliefs.
Inheritance Tax is primarily a tax levied on the value of assets of someone who has died, after all of their liabilities, such as any money owing on a mortgage, have been settled.
As the OTS report says: “Inheritance Tax is often said to be unpopular and raises strong emotions, not least because it affects people only occasionally, in sometimes significant and surprising ways, and at a sensitive time.”
The OTS is the independent adviser to government on simplifying the UK tax system, to make it easier for the taxpayer. The organisation works to improve the experience of all who interact with the tax system. It aims to reduce the administrative burden - which is what people encounter in practice - as well as looking to simplify the rules.
This latest report contains 11 recommendations to deliver a more coherent and understandable structure of the tax. Four main areas are grouped as packages, where some elements have an Exchequer cost and others raise money. They are: the taxation of lifetime gifts; looking at who pays tax where lifetime gifts are taxable; simpler exemptions for lifetime gifts; and a review of business exemptions to ensure they are focused on the policy goals and are consistent across different taxes.
There are several exemptions from Inheritance Tax relating to lifetime gifts, which haven’t changed since the 1980s. These are exemptions for the first £3,000 given away each year, for individual gifts of up to £250, gifts to someone getting married or entering a civil partnership and regular gifts out of a person’s disposable income.
Bill Dodwell, OTS Tax Director, said: “The taxation of lifetime gifts is widely misunderstood and administratively burdensome. We recommend replacing the multiplicity of lifetime gift exemptions with a single personal gift allowance, to be set at a sensible level, and incorporating an increased lower threshold for small gifts. The exemption for regular gifts should be reformed or replaced with a higher personal gift allowance.”
He added: “We recommend that the seven-year period be shortened to five years (significantly reducing the workload on executors) and abolishing the tapered rate of Inheritance Tax (which many find works in a counter-intuitive way). Data made public for the first time shows the tax paid on gifts six or seven years before death is low.”
Where there is Inheritance Tax to pay on lifetime gifts, the OTS recommends the government explores options for simplifying and clarifying the rules on who is liable to pay this tax, and how the £325,000 threshold is allocated between different recipients.
Kathryn Cearns, OBE, OTS Chairman 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.”
If you’ve got any questions about how to reduce your inheritance tax liability or even to understand if you have one in the first place, do call The Goodman Partnership on tel: 01892 500600 or click here.