A High-Level Look at the Main Recommendations of the OTS’s IHT Review

In January 2018, the Office of Tax Simplification (OTS) was asked to review various aspects of inheritance tax (IHT).  The first report was published in November of 2018, where it was highlighted that fewer than 25,000 estates are liable to IHT each year, which is less than 5% of all deaths, even though 10 times as many estates needed to complete forms.  In July 2019, the second report was published, which has led to various recommendations that the OTS considers, if implemented, would make IHT easier to understand and operate.

Here we look at the high-level detail of some of the main recommendations:

• Replace the £3,000 annual gift exemption and the exemption for gifts in consideration of marriage and civil partnership with a personal gifts allowance (the annual exemption has been frozen since 1981 and the marriage/civil partnership gifts since 1975).

• Reconsider the level of the small gifts exemption (which has been £250 since 1980).

• Reform the normal expenditure out of income exemption or replace it with a higher personal gifts allowance.

• Reduce the 7-year period, so that gifts made more than 5 years before death are exempt.

• Abolish taper relief, which the OTS report says is poorly understood and advisers find difficult to explain.

• Remove the ‘confusing’ 14-year rule, where gifts are taken account of beyond the 7-year period where there is a combination of PETs and chargeable transfers.

• IHT in relation to lifetime gifts to individuals to be paid by the estate.

• The nil rate band to no longer be allocated to lifetime gifts in chronological order but allocated proportionately across total gifts with anything remaining available to the estate.

• Where an IHT relief or exemption applies, the capital gains uplift to be removed and instead treat the recipient as acquiring the assets at the base cost of the person who has died.

• Death benefits from term insurance to be IHT free, without the need for a trust

• POAT rules to be reviewed to see if they function as intended and if they are still necessary.

This is of course just a brief summary of some of the main points of the report which can be found here.

What’s clear is that some of what the OTS recommends is far-reaching, and if implemented, will be welcomed by many advisers (and CII students) – not the least the complicated 14-year rule, which has always caused confusion and would make record keeping much easier if it was abolished.

As with any proposals, there will be those who benefit and those who will be disadvantaged; all we can now do is wait and see whether the government takes it all (or any of it) on board.

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