Around 590,000 people die in the UK every year and 275,000 complete inheritance tax forms. Only 24,500 estates ultimately pay the levy, but it is still widely despised. The Office of Tax Simplification (OTS) describes inheritance inheritance tax as "almost uniquely unpopular". The main complaint is that it is a double tax the taxman is taking another slice of money you were already taxed on when you earned it but it is also deemed a tax on dying.
Now, however, "Britain's most hated tax" is set to change, reports Harry Brennan in The Daily Telegraph. A review of inheritance tax by the OTS, requested by Chancellor Philip Hammond, has suggested several changes to make the complicated tax simpler.
One key reform would be the gifting rules. At present you can give up to £3,000 a year away free from inheritance tax, plus £1,000 for wedding presents (more if you are related to the bride and groom). You can also make as many small gifts of up to £250 as you like. Give away more than that and your gifts could be subject to 40% inheritance tax when you die.The OTS wants to scrap all those different gifting rules to create one single, higher "personal gifting allowance". It noted that the current £3,000 allowance would be worth £11,900 today if it had kept pace with inflation rather than being frozen since 1981.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
The OTS also wants to cut the seven-year rule to five years and abolish the sliding inheritance tax scale applied during those years. At present if you make a gift beyond the annual allowances and die within seven years it counts as part of your estate for inheritance tax purposes.
If you die within three years the gift it is taxed at 40%, falling to 32% in year three then gradually sliding away to 8% in year six. After seven years you pay nothing. Under the proposed change if you die within five years of a gift it would be taxed at 40%, but there would be no tax due after that.
In order to make inheritance tax rules simpler the OTS also suggested abolishing the 14-year rule that means lifetime gifts into a trust are subject to inheritance tax. It also wants to remove the tax on death-benefit payments from life insurance companies. This means life insurance policies wouldn't need to be held within a trust in order to avoid inheritance tax.
There could be bad news for Aim investors, however. The OTS wonders whether Aim portfolio funds designed to provide IHT relief are "in the spirit of the rules," says Dylan Lobo on Citywire.co.uk.
At present certain Aim shares are free from inheritance tax owing to business property relief (BPR). This tax relief was brought in to prevent family farms or businesses from being split up to pay inheritance tax bills. Fund houses have built Aim portfolio funds designed to reap the benefits of this inheritance tax loophole.
The question, says the OTS, is "whether it is within the policy intent of BPR to extend the relief to such shares, in particular where they are no longer held by the family or individuals originally owning the business."
-
Water companies blocked from using customer money to pay “undeserved” bonusesThe regulator has blocked three water companies from using billpayer money to pay £1.5 million in exec bonuses
-
Will the Bitcoin price hit $100,000?With Bitcoin prices trading just below $100,000, we explore whether the cryptocurrency can hit the milestone.
