Reforming the Rules on Gifts

Reforming the Rules on Gifts

Simplifying the Design of Inheritance Tax

The second report of the Office of Tax Simplification (OTS) on its review of IHT, entitled Simplifying the design of inheritance tax, explores the complexities and technical issues around gift exemptions, lifetime gifts, and distortions in the way business property relief and agricultural property relief operate.

The Report has produced proposals to reform the rules surrounding giving.  Currently, £3,000 a year can be given away tax-free without this being added to an estate for Inheritance Tax purposes.  In addition, there are allowances available to cover gifts for a child’s wedding or civil partnership, grandchildren and other relations.

The OTS is recommending that these various allowances are streamlined into a single personal gift allowance. It is also recommended that the amount of £3,000 should be raised to take account of inflation.  While the Report does not suggest any specific figure, it does point out that, if upgraded, it would now be worth £11,900.

Another proposal is that where gifts, for example giving money to a child to buy a house, do fall to be taxed if the donor dies within seven years of the gift, the time limit for taxing gifts is reduced from seven to five years and that the burden of tax should fall to the estate and not to the beneficiary.  For gifts deemed chargeable transfers (mainly gifts into trusts) during their lifetime, this would be reduced from 14 years to five years.

The combination of the introduction of a personal gift allowance and the reduction of the time limit to five years are aimed not only to simply matters but also to encourage the handing on of wealth at an earlier stage.  To assist this further, it is proposed to close the loop-hole that allows certain assets to be inherited free of Capital Gains Tax, thus encouraging the retention of such assets for the purposes of tax planning. The CGT uplift means assets can be sold shortly after death without either IHT or CGT consequences.

On closer inspection, some of the proposals may be viewed as less friendly. There is a  proposal to reform the exemption for ‘normal expenditure out of income’ which, provided the gifts do not result in the client using capital in place of income, are tax free, or replace it with a higher personal gift allowance. Although the exemption is not widely used or probably even known about, for high earning individuals it can be a way to pass substantial money down without running the risk of the seven year time limit.

With the proposal to reduce the time limit to five years, comes a proposal to abolish taper relief. The removal of taper relief would mean that substantial gifts will see no tax deduction after three years and will need to have a survival rate of the full five years to have any Inheritance Tax benefit.  Although as most giving is within the nil rate band, taper relief which applies to the tax payable (and not as most people think  to the value of the gift), combined with the proposed reduction in the survival period to five years,  it is suggested probably more people would win than lose. But for the few making large gifts, the loss of taper relief could prove costly.

Amongst other recommendations is one to re-examine Pre-Owned Asset Tax., with Recommendation 11 calling  on the government to review the POAT rules and their interaction with other IHT anti-avoidance legislation to consider whether they function as intended and whether they are still necessary,

John Bunker, chairman of the CIOT’s succession taxes sub-committee, is quoted as saying ‘Particular attention will be needed to the proposals to change the rules on where liability for tax falls as between recipients of lifetime gifts and those who inherit on death. This is very much a matter of fairness between different people rather than raising more or less money for the exchequer. People’s wills have been drawn up on one basis but risk being taxed under another and some of the proposals on allocation of liability have much wider implications.’ (Tax Journal 10 July 2019)  

Particular attention will also be required to ensure that, where chattels are involved, current, accurate and appropriate valuations are maintained as there will be cases where the market for the chattels involved may be highly volatile e.g. Indian & Asian works of art, jewellery, gold, etc.




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