The Office of Tax Simplifications has published a raft of recommendations to make inheritance tax easier for consumers to understand.
The report was commissioned by the Chancellor of the Exchequer, Philip Hammond, after a consultation highlighted how poorly understood the tax is. According to HMRC just 45% of people giving money away knew how inheritance tax worked.
At present inheritance tax is charged at a rate of 40% on estates over £325,000. However, people passing on a family home to children or grandchildren can take advantage of an additional threshold, boosting their total tax-free allowance to £475,000 in the current tax year.
Families are also able to reduce the value of their estate by giving money away tax free with annual allowances for gifts and potentially exempt transfers (PETs). These are gifts of any value that become totally tax free if the person making the gift is still alive seven years after it is made. Transfers of assets between spouses and civil partners are also tax free.
However, despite the broad variety of allowances and the introduction of the residential nil rate band in 2017, the amount of inheritance tax families are paying continues to rise, with receipts hitting £5.4 billion in 2018/19, up from £5.2 billion the previous year.
In order to simplify this complex tax the OTS has proposed changes to the rules governing the taxation of gifts made in an individual’s lifetime.
Bill Dodwell, OTS tax director says: “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.”
Amongst its recommendations the OTS also wants to refresh rules on PETs. “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.”
He adds: “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.”
The OTS is also calling for the interaction between IHT and capital gains tax to be reviewed, for example in relation to reliefs that apply to businesses and farms.
If you simplify IHT then many solicitors will have less work.
Is that what Parliament really wants?
Given house price increases, Parton the south east, the threshold level should be much higher that £325,000. Many older people caught in this trap just because of house increases. The PET should be reduced to 3 years instead of 7.
The government sold off.all the council houses and just about anything else owned by the state and now we are going to pay the price in higher taxes. So for those of us who have made a few quid and looked after ourselves for the benefit of our kids will be or they will be in taxed to pay for successive governments mismanagement of the economy. Just wait and see in 10 years you will only be able to leave 150k to your kids before the state steal it in tax
I think single/divorced/childless people are discriminated against when it comes to the Residential NIL Rate band introduced. I feel that they SHOULD be able to gift their property to OTHER family members, e.g. nieces/ nephews/grandchildren -i.e. still keeping it in the family as "spouses" are able to!
Inheritance tax is legalised theft
Tax me on what I earn.
Tax me on what I buy.
Tax me on my stuff again when I die.
Why not take the shirt off my back while you're at it?
Inheritance tax between parents and children should be abolished altogether. After all we all strive for our children and what is wrong with that? I didn’t inherit anything from my parents but loved them all the same. I worked and saved hard and I am in a position to leave something for my children and what right does the taxman have to grab it from what I want to leave them? He has already taxed me on everything I have. No inheritance between parents and children, that’s the vote winner. !!!!!
I think all IHT allowance & its Gifts should be allowed free of taxes. I read that all these allowances amounting to £1 million to be tax free by 2020 enacted by Mr.David Cameron & Mr. GEORGE Osbourne. Are we following there ruling????. How to substantiate or proof-read the gifts to HMRC?. Any thoughts!!!.
Residential Nil-Rate Band
You state that peoples allowance is £475,000 if they pass on their family home to their children.
Is this the case if your family home is only worth £100,000 ???????