Prepare for big changes to inheritance tax

Inheritance tax – Britain’s most detested tax – is set for an overhaul.

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.

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."

Recommended

Pass on your pension without paying inheritance tax
Personal finance

Pass on your pension without paying inheritance tax

The 2015 pension reforms make it easier for you to ensure your heirs avoid inheritance tax when you die
29 Jan 2020
Properties for sale for around £1m
Houses for sale

Properties for sale for around £1m

From a two-bedroom garden flat in Notting Hill, London, to a Grade II-listed medieval hall house in Dorking and a 17th century farmhouse in Nottingham…
22 Jan 2021
Lockdown hammers commercial landlord Hammerson
Property

Lockdown hammers commercial landlord Hammerson

Three quarters of the tenants of shopping-centre operator Hammerson have been forced to close during the lockdown.
21 Jan 2021
How to deal with self-assessment tax returns after a very trying year
Tax

How to deal with self-assessment tax returns after a very trying year

The Covid-19 pandemic will complicate the self-assessment tax return process for 2019-20. What if you can’t pay? Ruth Jackson-Kirby has some advice.
20 Jan 2021

Most Popular

Why we won’t see a house-price crash in 2021
House prices

Why we won’t see a house-price crash in 2021

Lockdown sent house prices berserk as cooped up home-workers fled for bigger properties in the country. And while they won’t rise quite as much this y…
18 Jan 2021
Inflation is the easiest way out of this – just don’t expect politicians to admit it
Inflation

Inflation is the easiest way out of this – just don’t expect politicians to admit it

The UK government borrowed £34.1bn in December, a record amount for that month. Britain's debt pile now amounts to 100% of GDP. How are we going to pa…
22 Jan 2021
When will the US stockmarket bubble burst?
US stockmarkets

When will the US stockmarket bubble burst?

With US stocks more expensive than before the Wall Street crash of 1929, there are growing signs of “mania”. But what will push markets over the edge?
22 Jan 2021