The Association of Taxation Technicians (ATT) has welcomed the Chancellor Philip Hammond’s call for a review of inheritance tax.1
At present, gifts given in the seven years before you die are taken into account when calculating the IHT on your estate. Substantial gifts made three to seven years before your death can benefit from a tax reducer known as ‘taper relief’.
Yvette Nunn, Co-chair of ATT’s Technical Steering Group, said:
“We would ask the OTS to look at the simplification of taper relief as part of their review. Restructuring taper relief so that the gifts themselves were tapered would be much more intuitive to the public than the present method, and open up the benefit of the relief to those making gifts which are less substantial.”
In the current form, due to the way that the nil rate band works, to benefit from taper relief an individual would generally need to have made gifts of more than £325,000 in the seven years prior to death. As it stands, an individual who has gifted £500,000 four years prior to death would benefit from taper relief, while an individual who instead gifted £50,000 may get no benefit from taper relief if their nil rate band is available to reduce the value of the gift.2
Another powerful relief is available for gifts which are considered normal expenditure out of income. This relief allows individuals to gift away surplus income in excess of their normal expenditure and the gift is exempt from tax immediately – there is no need to wait for seven years to elapse.
Yvette Nunn said:
“In order to claim the relief it requires a detailed analysis of the deceased’s income and expenditure to prove that the income was ‘surplus’. This can prove a very challenging exercise for executors to prove the position and we hope the OTS will consider ways in which this might be simplified as part of the review.”
Notes for editors
- The letter was made public yesterday (29). A scoping document for the review will be agreed and published in due course. See here.
- The general rule is that gifts stay ‘on the clock’ for seven years. On death the executors must look back over the deceased’s gifting history and see if there are gifts within the previous seven years on which inheritance tax (IHT) may be due, or which absorb some of the nil rate band, such that more IHT is due on the death estate. The current nil rate band for an individual is £325,000. If the deceased made a gift to a child six years and 11 months prior to death, that gift would have to be taken into account in full in their IHT computation. If they had made it two months earlier, it would be exempt.
There are some tapering provisions which act to soften that strict seven year cut off, but they do not work intuitively. Instead of reducing the taxable value of the gift itself, the taper reliefs apply to the tax after reliefs. The tax is reduced by 20 per cent if the gift was made three to four years prior to death, 40 per cent for four to five years, 60 per cent for five to six years and 80 per cent for six to seven years. If there is no tax, taper relief does not apply. Instead the full value of the gift is left ‘on the clock’ and may well impact on the tax on the death estate by absorbing some or all of the nil rate band.