Proposed changes to UK’s ‘most-hated tax’ means gifts made more than five years before would be exempt

The “seven-year rule” on gift-giving should be cut to five years as part of a radical shake-up of inheritance tax, according to an official review ordered by the chancellor.

The Office of Tax Simplification (OTS) has proposed that executors would only need to account for gifts made within five years of death rather than seven years currently. But some tax experts said another proposed change linked to this would increase tax for some people.

Inheritance tax has been dubbed Britain’s most hated tax, although it affects relatively few people: fewer than 25,000 estates are liable each year, which is less than 5% of all deaths.

Estates pay 40% tax on assets above the £325,000 threshold, and the OTS has now proposed changes to make the system more streamlined. Under the current regime, if there is tax to pay on gifts it is charged at 40% on those given in the three years before the individual dies, while those given three to seven years before death are taxed on a sliding scale known as taper relief.

The OTS said the government should reduce the seven-year period to five years, so gifts to individuals made more than five years before death would be exempt, though it added that this would result in a loss of government revenue.

The report also proposed scrapping taper relief, though it acknowledged this would create a “cliff edge” at the five-year point, where just one day would make the difference between paying 40% tax and nothing at all.

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The OTS also called for the confusing array of gift exemptions to be swept away and replaced with a “single personal gift allowance”, which would allow an individual to give up to a fixed amount each year.

This would mean the end of the annual exemption, where someone can give away £3,000 worth of gifts each tax year without them being added to the value of their estate. This amount has been frozen since 1981 and would be £11,900 today had it increased in line with inflation.

Bill Dodwell, the OTS’s tax director, said the single allowance should be set “at a sensible level”.

Tax experts broadly welcomed the proposed changes. However, some expressed concern about some measures. Laura Suter, a personal finance analyst at investment firm AJ Bell, said the seven-year rule and taper relief were “hideously complex”. But she added: “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.”