Tax experts are recommending ministers to take action to simplify inheritance tax rules.
The Office of Tax Simplification, an independent government agency looking at how to improve the UK’s tax system, has issued a report looking at IHT.
The tax gurus have put forward 11 recommendations – but warn ministers will have to change the law for them to have any effect.
The report suggests changes to gifting cash, property and other assets while someone is still alive.
Under current rules, if the asset is not IHT exempt, the giver must live for seven years before the gift is IHT-free.
Misunderstood and burdensome
Bill Dodwell, tax director at the OTS, 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.
“We recommend that the 7-year period be shortened to five years and abolishing the tapered rate of Inheritance Tax. Data made public for the first time shows the tax paid on gifts six or seven years before death is low.
Call to simplify IHT rules
“Where there is IHT 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 consultation looks at the interaction between IHT and capital gains tax, and reliefs available for businesses and farms.
“Aspects of the regime distort the decisions families face when passing assets to the next generation, where there are different tests applying to what is broadly the same activity,2 says the report.
The report also recommends addressing these distortions by asking the government to consider if tax reliefs are targeted most effectively at policy objectives.
OTS chair Kathryn Cearns said: “Although only a small number of people pay IHT 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.”