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There might be some good news on the horizon surrounding potentially Britain’s most hated tax. Inheritance tax states that for any asset above the £325,000 threshold, estates must pay 40% tax. Despite only affecting less than 5% of deaths in the country (fewer than 25,000 estates), the Office of Tax Simplification (OTS) is proposing changes to the way the tax is set up.
Currently, the “seven-year rule” asserts that for any gift given within three years of an individual’s death, if there is tax owed, the estate is charged at 40%. From three to seven years, taxes that might be owed are based on a sliding scale, called taper relief.
The OTS has proposed changes to inheritance tax rules
After being tasked with an official review of inheritance task by the chancellor, OTS is proposing some changes.
- Possibly the most impactful alteration would be reducing the seven-year term to only five years.
- The OTS suggests scrapping taper relief altogether.
- They also suggest replacing the vast and confusing gift exemption rules with a “single personal gift allowance’ which would let an individual gift a fixed amount annually.
Single personal gift allowance could perhaps be the most radical change as it would effectively end the annual exemption that allows an individual to give away £3,000 worth of gifts per tax year without affecting the value of their estate. This allowance amount has been frozen since 1981 and hasn’t increased with inflation – if it had, the value would now be around £11,900. While the OTS is not necessarily recommending this exact amount, they do believe the allowance should be increased to a “sensible level.”
Will it make a difference?
Diving into the potential consequences of proposed changes, some tax experts argue that they wouldn’t actually alleviate any tax burden for some individuals and may indeed increase taxes owed in some cases.
The removal of taper relief will also create unnecessary worry where one day past the new official five-year mark would mean the massive difference between no tax paid versus 40% owed.
A downside for HMRC would be the potential loss of government revenue, which would undoubtedly need to be recouped somehow, while others argue these changes seem to be a blatant attempt to raise revenue, something only time will tell.