Rules on gifts made to loved ones should be simplified, says the OTS

Fewer people should have to pay tax on gifts made to loved ones in the years before their death, according to the Office for Tax Simplification (OTS).

Under the current rules, inheritance tax of up to 40% is paid when someone dies within seven years of making a gift.

The OTS called on the Treasury to reduce the period at which tax is due on gifts from seven to five years.

The five-year period was chosen to ease the administrative burden for executors of wills, who said it can be difficult to obtain records going back seven years.

The record-keeping problem is reportedly worse for individuals who have made gifts into trust, where the relevant period can be up to 14 years.

In addition to reducing the seven-year period to five years, it recommends abolishing the taper relief, so gifts given within the five years would be taxed at 40%.

Anyone can give away up to £3,000 a year without the gifts being added to the value of their estate.

Any unused annual exemption can be carried forward to the following tax year, meaning up to £6,000 of exemption could be available in a single year.

Gifters can usually hand out gifts to different recipients up to a value of £250, while there are other related exemptions such as one that allows contributions towards wedding costs.

The OTS proposed scrapping a raft of these allowances in favour of introducing a single personal gift allowance, and an increased lower threshold for small gifts.

Kathryn Cearns, chair of the OTS, said:

“Inheritance tax is unpopular and raises strong emotions, not least because it affects people only occasionally, in sometimes significant and surprising ways, and at a sensitive time.

“We hope that consideration of the ideas explored in this report can help support fruitful dialogue [with the Treasury] about the ways it can and should be improved.”

In January 2018, former chancellor Philip Hammond asked the OTS to review the inheritance tax system.

The first report covered the administration of inheritance tax and was published in November 2018.

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