The Office for Tax Simplification (OTS) has said that fewer people should have to pay tax on gifts made to loved ones in the years before their death.
Under the current rules, inheritance tax of up to 40% is paid when someone dies within seven years of making a gift. The OTS has however called on the Treasury to reduce the period at which tax is due on gifts to five years.
The five-year period was chosen to ease the administrative burden for executors of wills, who said it can be difficult to obtain records going back seven years. The record-keeping problem is reportedly worse for individuals who have made gifts into trust, where the relevant period can be up to 14 years.
In addition to reducing the seven-year period, The OTS also recommends abolishing the taper relief. This means that gifts given within the five years would be taxed at 40%.
What are the current rules surrounding gifts to loved ones?
The current rules state that anyone can give away up to £3,000 a year without the gifts being added to the value of their estate.
Any unused annual exemption can be carried forward to the following tax year, meaning up to £6,000 of exemption could be available in a single year.
Gifters can usually hand out gifts to different recipients up to a value of £250, while there are other related exemptions such as one that allows contributions towards wedding costs. The OTS proposed scrapping a raft of these allowances in favour of introducing a single personal gift allowance, and an increased lower threshold for small gifts.
Speaking about tax on gifts, Kathryn Cearns, chair of the OTS commented:
“Inheritance tax is unpopular and raises strong emotions, not least because it affects people only occasionally, in sometimes significant and surprising ways, and at a sensitive time. We hope that consideration of the ideas explored in this report can help support fruitful dialogue [with the Treasury] about the ways it can and should be improved.”
The OTS also says that inheritance and tax on gifts is poorly understood, counter-intuitive, requires substantial record keeping, creates distortions and is quite simply unclear. Tax director at the OTS, Bill Dodwell commented:
“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.
‘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).”
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