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Radical revamp of inheritance tax rules proposed

Emma-Lou Montgomery

Emma-Lou Montgomery - Fidelity Personal Investing

The seven year rule around gift-giving should be cut to five years, according to an independent review that proposes a radical shake-up of the existing law around inheritance tax.

Radical revamp of inheritance tax rules proposed

Under current inheritance tax (IHT) rules, tax is payable at 40% on gifts given in the three years before you die. And that is reduced on a sliding scale up until seven years and beyond, when gifts made that long ago are deemed to be free from any IHT charge.

The report suggests scrapping this sliding scale too.

The review, ordered by the Chancellor Philip Hammond, and conducted by the Office of Tax Simplification, concluded that the current seven year rule was hampered by the fact that corroborating documents, such as bank statements, are only available for the previous six years.

This, they said, makes settling people’s affairs difficult for executors who do not always have the necessary documents available to them.

Figures show that around 5% of estates are liable for IHT, charged at 40% above an individual’s £325,000 threshold. Data from HM Revenue & Customs shows that £7 million of the total £4.38 billion paid in inheritance tax in the tax year 2015-16 came from gifts made more than five years before the gift-giver’s death.

The Treasury has yet to give its response to the recommendations, but the report by the Office of Tax Simplification is the second and final stage of its review of the current IHT rules. Previously in November, it recommended that something needed to be done to simplify the burden of complex administration and excessive form-filling that falls on bereaved families.

And that’s not all the Office of Tax Simplification suggested. It also recommended introducing a single personal IHT allowance.

Under the current rules, which have remained unchanged since the 1980s, various rules apply to each person, depending on how much they are gifting and to whom.

Under the current rules there’s no IHT to pay on gifts between spouses or civil partners. You can give them as much as you like during your lifetime. But other gifts count towards the value of your estate and can leave the recipient with an inheritance tax charge when you die.

It’s complicated. People you give gifts to will be charged IHT if you give away more than £325,000 in the seven years before your death. And a gift can be anything of value - so money, property or possessions.

However, there are exemptions, and you can currently give away £3,000 worth of gifts each tax year without them being added to the value of your estate. This is known as your ‘annual exemption’. You can carry this annual exemption forward if you don’t use it - but only for one year.

Besides that, you can also give away wedding or civil ceremony gifts of up to £5,000 if it’s to your child and £2,500 to your grandchild or great-grandchild, or £1,000 to anyone else.

In addition, you can also give away as many gifts of up to £250 per person as you want, as long as you haven’t used another exemption for that same person - such as £2,500 already for your grandchild’s wedding. Birthday and Christmas presents aren’t included in all this, as long as you can “maintain your standard of living” after giving them whatever it is you want to.

I told you it was complicated.

However, an aversion to leaving your loved ones with a tax bill when you die, shouldn’t deter you from investing wisely during your lifetime. Utilising the various tax-efficient savings plans from ISAs to SIPPs is an obvious starting point and working out the best way to manage your estate and the distribution of your assets before and after your death should be discussed with a specialist in this area of taxation, to make sure that more of what’s yours goes into the pockets of your loved ones - and not the tax man’s.

My colleague Ed Monk explains more here.


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Important information

The value of investments can go down as well as up so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Tax treatment depends on individual circumstances and all tax rules may change in the future. Withdrawals from a pension product will not be possible until you reach age 55. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.