Office of Tax Simplification proposes changes to inheritance tax rules
The Office of Tax Simplification has made a number of proposals outlining how it would like the rules on inheritance tax to change.
It may come as a surprise that inheritance tax can be chargeable to gifts made during someone’s lifetime, rather than just what passes under their Will or the intestacy rules (these apply if a person did not leave a valid Will). Under the current inheritance tax rules, if someone dies within seven years of making a gift (of money, property or possessions etc) then inheritance tax of up to 40% may be chargeable on the gift when they pass away. These gifts are more commonly known as ‘potentially exempt transfers.
However, the current rules on gifts during a lifetime are complicated. For example, an individual can give away up to £3,000 worth of gifts each tax year without incurring inheritance tax liability on these. If unused, the allowance can be carried over to the following year (up to maximum of £6,000). There are also other allowances for things such as gifting money towards wedding costs and gifts out of income, rather than capital.
The Office of Tax Simplification has suggested the seven year deadline should be reduced to five (partially due to the fact that finding paperwork going back this far is very difficult). They have also proposed that the inheritance tax rules should be made much easier to understand. If there are changes to be made to the inheritance tax rules, it may affect those who are planning their estates and also those who are relying on inheritance in the coming years.
It is unfortunate that the Office of Tax Simplification did not comment on one of the most complex areas of inheritance tax, the Residence Nil-Rate Band (RNRB). The RNRB allows for £150,000 (increasing to £175,000 in the next tax year) to be free from inheritance tax if a person leaves a home they’ve owned (or owned a share of) to their direct descendants.
If you would like advice about your own estate planning or more generally about the current inheritance tax rules, please contact a member of the Private Client Team.
Ann-Marie Matthews is a solicitor in the private client team at Barker Gotelee, Ipswich Solicitors.