The current rules are that you can give away as much as you like to a non-exempt individual but you must survive the date of the gift by seven years to avoid the value given being taxed at 40% on your death, assuming the value of your estate on death is over the prevailing IHT allowances. If you die within seven years of the date of the gift, your executors must include the value of any gift(s) made when calculating any IHT due but can apply taper relief (where applicable) to the value given away, assuming you survive the date of the gift by a minimum of three years. For gifts that are sufficiently large, taper applies as follows:-
| Years between gift and death |
Tax paid |
| Less than 3 years |
40% |
| 3 to 4 years |
32% |
| 4 to 5 years |
24% |
| 5 to 6 years |
16% |
| 6 to 7 years |
8% |
| 7 years or more |
0% |
The OTS proposed that the seven year rule be reduced to five years, with tapering being removed altogether. This means that whilst the length of time you need to survive the date of the gift is reduced, the removal of taper relief could mean that more IHT is paid for sufficiently large lifetime gifts. For instance, if someone dies four years and 355 days after making a gift, the value of the gift is taxed at 40% whereas, had taper applied, the value of the gift would be taxed at 16%.
In addition to the above, the OTS has called to simplify gift exemptions. One of the annual gift exemptions allows you to give away £3,000 to any non-exempt individual as well as using any unused allowance from the previous tax year. Interestingly, they have increased the allowance which has stayed the same since 1981 (which would be somewhere in the region of £11,000 had it increased with inflation). Other allowances currently available are:-
• Wedding / civil ceremony gift - £1,000 per person, £2,500 for a grandchild / great-grandchild or £5,000 for a child;
• Small gifts of £250 to as many individuals as you would like (so long as they do not fall within another exemption listed above);
• Gifts from surplus income; and
• Gifts to charity / political parties.
The OTS have suggested that the annual allowance and all the other allowances listed above are removed and replaced with a higher single annual allowance for individuals.
Is the ‘simplification’ of gifting by the OTS simply another step to increasing their revenue? It would seem so.
For more information on giving IHT efficiently, please contact a member of the Tax Planning team.
