Inheritance Tax or ‘the dreaded tax’ as it’s sometimes known continues to rise, with HMRC receiving £5.4 billion in 2018/19, compared to £5.2 billion the previous year.
A review of inheritance tax by the Office of Tax Simplification (OTS), requested by Chancellor Philip Hammond, has suggested several changes to make Inheritance Tax on gifts to loved ones simpler to understand and improve inheritance tax administration.
The current system
At present, the current system can appear to be complicated. You are able to give away £3,000 worth of gifts each year tax-free. If unused, this can be carried over to the following year, making a maximum tax free allowance of £6,000.
You can also give up to £250 to any other recipient and £5,000 towards your child’s wedding costs. A gift is also generally discarded for inheritance tax purposes if it is funded out of your income and made on a “regular” basis.
For full details about what gifts are currently exempt, please see here.
Gifts and Taper Relief
If you make a gift that does not fall into any of the above categories, then it will be free of inheritance tax if it is made more than seven years ago or, if in the seven years leading up to your death you give away less than £325,000.
Anything above £325,000 will be subject to what is known as taper relief.
Put simply, taper relief is a percentage reduction in the tax payable, if the gift was made more than three years but less than seven years before your death. For example, if you were to gift your child an asset worth £400,000 and passed away 4 years later, then the property would only be subject to inheritance tax at 20% compared to the usual 40%.
Proposed changes
In practice, the OTS found that the current system is poorly understood and requires substantial record keeping. Therefore, it has recommended that all of the above allowances are discarded and replaced with a single, higher, personal gift allowance.If you make a gift that is not subject to the allowance then the seven year rule, as described above, will be replaced with a five year rule.
However, this will not be subject to taper relief. This means that if you were to pass away at any time after five years of making a substantial gift, there will be no tax deduction and you will need to survive the full five years for there to be any inheritance tax benefit. Otherwise, the recipient will be liable to inheritance tax at 40%.
The effect of the changes to Inheritance Tax
Some commentators have welcomed the proposals, saying that they will create an increased certainty for executors administrating an estate, and for people looking to plan ahead for the future.
Whilst this may be the case, others have criticised that it is an ‘all or nothing’ approach and could lead to more tax being taken as a result of taper relief being discarded.
Laura Suter, from investment firm AJ Bell commented:
“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.”
What can I do about it?
It is difficult to speculate on if and when these proposals will come into effect. Even if the government accepts any of the recommendations, it would take some time for the proposals to be consulted on and become law.
Despite this, the OTS has commented that those who take inheritance tax advice are paying less tax than those who don’t.
Therefore, individuals contemplating gifting their assets in light of the proposed changes should always seek legal advice before committing themselves to transactions that could potentially have a negative impact further down the line.
If you have any concerns regarding the effect of these changes, or would like to discuss inheritance tax and estate planning in general, please contact Bryony Wilmshurst from Cunningtons Solicitors’ Wills and Probate department here at bryony.wilmshurst@cunningtons.co.uk or you can call on 01376 567280.