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IHT review proposes simplifying tax gift rules

The seven-year rule, a cornerstone of the inheritance tax planning’s gift rules, should be cut down to five, an independent review has proposed in a bid to simplify the rules.

The proposal is part of the Office for Tax Simplification second review of the IHT published today, and builds on the previous – November’s consultation’s recommendation that excessive administration should be lowered, as bereaved families said the system is far too complex.

According to current rules, assets given during one’s life are exempt from inheritance tax, if given within the individual’s life, if they live seven years after the gift was given. If the gift is given in the three years before an individual’s death, it is charged at 40 per cent. Gifts made three to seven years before one’s death are taxed on a sliding scale known as ‘taper relief’.

Phil Wickenden: IHT system is still crying out for reform

Canada Life Wealth and tax specialist Neil Jones says: “The rules around gifting are ripe for review. One recommendation is to cut the seven-year rule down to five, so if you gift after five years it can effectively be done outside of IHT. This would obviously help more clients.

“It’s also proposed to remove the ’14-year rule’ entirely, meaning there would be no need to take in to account gifts made outside of the existing seven-year period.

“Getting rid of taper relief will be welcomed by many, as it’s extremely confusing even for many professionals.”

AJ Bell personal finance analyst Laura Suter adds: “The OTS rightly acknowledges that the seven-year taper rule is hideously complex, and can cause people to be landed with an unexpected inheritance tax bill years after they were gifted money. However, the suggestion of reducing the seven years down to five and scrapping taper relief entirely looks like a bald tax grab and revenue-raising move.

“Instead the taper could be simplified into a two-step process for example, or if it’s scrapped entirely then the period should be shorter than five years.”

Tony Wickenden: IHT change in the offing

Head of the private client team at law firm Kingsley Napley, James Ward says: “Clearly the stand out proposal from the OTS must be the reduction of the seven-year gifting rule to five years. This is a welcome proposal.

“However it does come with the removal of taper relief which means 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.”

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