Private Lives - Inheritance Tax review, estate planning and lifetime gifts


09 January 2020

In July this year, the Office of Tax Simplification (OTS) published its second report in relation to Inheritance Tax (IHT). The report contains 11 recommendations for simplifying the design of IHT. These are grouped into four main areas – taxation of lifetime gifts, who pays the tax on lifetime gifts, exemptions for lifetime gifts and business exemptions.

For now, the current rules still stand, but the Government will consider the recommendations and issue a response in due course.

So, how might the proposed changes affect you and your estate planning?

A large part of the report and the recommendations are to do with lifetime gifts - something which is often on people’s minds at this time of year! If done right, making lifetime gifts can be a really effective way of reducing your IHT liability on your death.

If you are considering making lifetime gifts as part of your estate planning, it is important that you are aware of the benefits and pitfalls of the current rules, allowances and exemptions, acknowledging not just how you might make use of them, but how the potential changes might require you to alter the way you make gifts.

Currently, if you die within seven years of making a gift, the person who received the gift may still have to pay IHT on it on your death. If you survive the gift by three or more years, then the rate of tax goes down (taper relief).

The recommendation is that this period is reduced to five years and that the taper relief is abolished. 
Currently, provided the amount of gifts made during the seven years before your death do not exceed your tax free allowance, (currently £325,000 on the nil rate band), the person receiving the gift will not have to pay tax on the gift. This is because the nil rate band is allocated first, chronologically against all the relevant gifts. However, if the amount of gifts made during the seven years before your death exceeds the nil rate band, then the recipient is liable for the IHT.

The recommendation is that the estate should be liable for the IHT and that the nil rate band should be allocated against all gifts proportionately.

Currently, there are a number of gifts you can make during your lifetime which are exempt from IHT, even if you die within seven years of making them. These include gifts up to the value of the annual allowance, gifts on the occasion of marriage and regular gifts made out of surplus income, to name a few.

The recommendation is that this is replaced with a single allowance to be known as the “personal gift allowance”. It is also recommended that gifts out of surplus income will no longer need to be “regular” although there would be a limit on the amount which could be given away.

As you can see, the recommendations propose substantial changes to this area. Several political parties have also addressed IHT in their recent manifestos in the election campaign, with various proposals.

Therefore, is is especially important to keep an eye on these changes over the coming months to ensure that your estate planning can be adapted accordingly.

This article is from the winter 2019 / 2020 issue of Private Lives, our newsletter covering the key legal and tax issues that individuals face. To download the latest issue, please visit the newsletter section of our website. 

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The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at January 2020.