Inheritance tax – Will the ‘seven year rule’ become the ‘five year rule’?
The Office of Tax Simplification (OTS) has recommended reducing the seven year period before death in which gifts are taxed down to five years. This would see a shake up of one of the bedrocks of inheritance tax planning.
In January 2018, the Chancellor asked the OTS to review Inheritance Tax. The first report was released in November 2018 which mainly covered administrative issues. The OTS have now released part two of the report which covers recommendations to simplify the design of this unpopular tax.
The OTS has seen unprecedented engagement and interest in the review from professionals and members of the public. This highlights the strong emotions that Inheritance Tax can raise with many feeling the tax is unfair and unduly complex. Whilst less than 5% of estates pay Inheritance Tax, far more people worry about the impact on them and their heirs, so making the system understandable is one of the main aims behind the recommendations in the report.
The key recommendations are:
- The seven year period in which gifts are taxed before death be reduced to five years.
- Taper relief, which can reduce the tax payable on gifts made more than three years before death, be abolished.
- The Capital Gains Tax ‘uplift’ on death be removed where assets qualify for relief from Inheritance Tax on death.
- The level of lifetime exemptions, which have remained the same since 1980, be reviewed.
- The ‘normal expenditure out of income’ exemption be reviewed and possibly abolished in favour of a greater lifetime allowance.
- Death benefit payments from term life insurance be Inheritance Tax free.
haysmacintyre Trust Director Stephanie Parker sat on the consultative committee which provided support and challenge to the OTS whilst they undertook the review. She comments,
“Some of the recommendations will no doubt be controversial. The reduction of the seven year period to five years may be seen as a ‘giveaway’ to wealthy individuals, even though some estates will end up paying more, whereas the Capital Gains Tax reforms will be unwelcome for those inheriting businesses. It remains to be seen to what extent these recommendations are taken up, but it is very clear from the report that simplification of this tax is long overdue”.