A recent review of inheritance tax (IHT) by the Office of Tax Simplification (OTS) suggests that the Government should make it simpler to pass wealth down through the generations.
According to the report, the most-criticised aspects of IHT were the residence nil-rate band and gift allowance. The residence nil-rate band allowance, which was introduced in 2017, gives individuals, who pass on their main property to their children, up to £150,000 tax-free. This is in addition to the £325,000 tax-free allowance enjoyed by everyone.
This nil-rate band allowance is controversial, as some believe it discriminates against people without children. Moreover, it is further complicated by some complex rules relating to people who want to downsize.
Among the reforms suggested by the OTS are an annual personal gift allowance, tax-free insurance payouts and changes to capital gains tax (CGT) charges on businesses.
Under the current system, an individual can give £3,000 as a gift every year, £5000 as a wedding gift to a child, £2,500 to a grandchild and £1,000 to another relative, without the gift affecting their estate for IHT purposes. Small gifts under £2500 are also exempt from IHT.
However, the OTS has suggested that these amounts should be replaced by one personal gift allowance of £11,900, with the smaller gift allowance being raised to £1,010.
The organisation also suggests that a separate exemption that exists for ‘normal expenditure out of income’, which enables individuals to give away spare income tax-free, could be wrapped into the personal gift allowance.
Moreover, the OTS recommends that gifts made more than five years before death should be exempt from IHT – the current rule is that gifts made fewer than seven years before death are liable for the tax.
