The Office of Tax Simplification (OTS) has produced a second report about the plans to simplify inheritance tax.
The OTS agreed with our comments in May 2019 that the various small exemptions covering lifetime giving are too complex. Their suggestion is to replace these with one overall personal gifts allowance. They also suggest reviewing the level of some allowances, for instance the £250 small gifts allowance, which if it reflected inflation would now be over £1,000; whilst the current £3,000 annual gift exemption would be £11,900.
They agree that the record keeping required to track gifts made up to seven years before death (or up to fourteen in some cases) are too complex and onerous, and state that it collects very little extra tax, hence they suggest a welcome reduction to a maximum of five years. In addition, the interaction between lifetime gifts and the nil rate band on death is complex and can produce unexpected consequences, so they suggest a more rational system of either sharing the band, or having the estate pay any tax on lifetime gifts.
The OTS propose reviewing the generous exemption for normal expenditure out of income, which is an allowance many people are reluctant to claim due to the record keeping involved, the lack of popular awareness and a lack of clarity about what constitutes income. There were only 579 claims in 2015/16 and over half of there were for gifts of less than £25,000 in total. One suggestion would be to limit the amount claimed to a fixed percentage of income, alternatively a higher personal gift allowance as suggested above could cover many of these claims.
They also recommend a review of the larger capital exemptions such as business property relief and agricultural property relief and their interaction with capital gains tax. It is believed that the structure of the exemptions may deter people from lifetime giving of family businesses.
We have long said that inheritance tax is too complex and needs reform. The major problem in the past was a tendency to tinker with specific details and not consider the overall pattern of the legislation. This constant tinkering has led to the current complexity. It would be desirable if the Government would take a step back and review the whole structure of inheritance tax, rather than continue the piecemeal adjustments.