Policy paper

OTS Inheritance Tax review: Simplifying the design of the tax

This second report makes recommendations to make substantive aspects of the design of Inheritance Tax simpler, more intuitive and easier to operate.

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Inheritance Tax Review: second report - web copy

Inheritance Tax Review: second report - print copy

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What is the OTS’s IHT report all about?

The OTS is the independent adviser to government on simplifying the UK tax system, to make it easier for the taxpayer. The OTS makes recommendations for the government to consider. It does not implement changes - these are a matter for government and for parliament.

Following a consultation process which generated an unprecedented level of interest - and made it clear that many people had limited understanding about the way Inheritance Tax works - this report explores the design complexities of the tax.

Inheritance Tax applies primarily on death, but also to gifts made to individuals within 7 years of death and to lifetime gifts other than to individuals, charities and qualifying political parties.

The report contains 11 recommendations to deliver a more coherent and understandable structure of the tax. Four main areas are grouped as packages, where some elements have an Exchequer cost and others raise money. They are: the taxation of lifetime gifts; looking at who pays tax where lifetime gifts are taxable; simpler exemptions for lifetime gifts; and a review of business exemptions to ensure they are focused on the policy goals and are consistent across different taxes.

Lifetime gifts

There are several exemptions from Inheritance Tax relating to lifetime gifts, which haven’t changed since the 1980s. These are exemptions for the first £3,000 given away each year, for individual gifts of up to £250, gifts to someone getting married or entering a civil partnership and regular gifts out of a person’s disposable income.

Bill Dodwell, OTS Tax Director, said:

The taxation of lifetime gifts is widely misunderstood and administratively burdensome.

We recommend replacing the multiplicity of lifetime gift exemptions with a single personal gift allowance, to be set at a sensible level, and incorporating an increased lower threshold for small gifts. The exemption for regular gifts should be reformed or replaced with a higher personal gift allowance.

We recommend that the 7-year period be shortened to 5 years (significantly reducing the workload on executors), and abolishing the tapered rate of Inheritance Tax (which many find works in a counter-intuitive way). Data made public for the first time shows the tax paid on gifts 6 or 7 years before death is low.

Where there is Inheritance Tax to pay on lifetime gifts, the OTS recommends the government explores options for simplifying and clarifying the rules on who is liable to pay this tax, and how the £325,000 threshold is allocated between different recipients.

Capital Gains tax, businesses and farms

The OTS consultation highlighted complexity in the interaction between Inheritance Tax and Capital Gains Tax, as well as in relation to the reliefs available for businesses and farms. Aspects of the regime distort the decisions families face when passing assets to the next generation, where there are different tests applying to what is broadly the same activity. The report makes recommendations to address these distortions and reduce complexity and asks the government to consider whether the reliefs are targeted most effectively at the policy objectives.

The report contains newly published HMRC data to inform the public about some of the costs and trade-offs inherent in the design of Inheritance Tax.

Kathryn Cearns, OBE, OTS Chairman said,

Although only a small number of people pay Inheritance Tax each year, a far greater number worry about it. The OTS’s packages of recommendations would go some way to achieving the goal of making the tax easier to understand and simpler to comply with.

Notes for editors

The OTS is the independent adviser to government on simplifying the UK tax system, to make it easier for the taxpayer. the OTS makes recommendations for the government to consider. It does not implement changes - these are a matter for government and for parliament.

The OTS works to improve the experience of all who interact with the tax system. It aims to reduce the administrative burden - which is what people encounter in practice - as well as looking to simplify the rules. Simplification of the technical and administrative aspects of tax are important, both to taxpayers and to HMRC.

During this review, which was requested by the Chancellor, the OTS consulted with a wide range of individuals and businesses effected by Inheritance Tax issues, receiving a record response to a call for evidence from individuals, advisers and the general public. There were nearly 3,000 responses to an online survey, a further 500 emails from individuals and over 100 written responses from experts. The first report, which dealt primarily with the administration of Inheritance Tax, was published in November 2018.

Press enquiries only, please contact

Charley Green, OTS Press Officer 03000 585021

Published 5 July 2019