Simplifying the design of Inheritance Tax

A report published by the Office of Tax simplification was released on 5 July 2019.

The report titled ‘Simplifying the design of Inheritance Tax’ explores three key areas of inheritance tax and make 11 recommendations within the report.

Key areas

  1. Lifetime gifts, including liability for paying any tax due on such gifts.
  2. Interaction with CGT.
  3. Business and Farms.

Lifetime gifts


The current IHT exemptions are considered to be complex, confusing and requires extensive record keeping.

Recommendation 1.

  • Replace the annual £3,000 gift exemption and gifts in consideration of marriage with an overall personal gifts allowance.
  • Reconsider the level of the £250 small gifts allowance.
  • Reform the normal expenditure out of income or replace it with a higher personal gift allowance.

Gifting period and taper

The 7-year period for lifetime gifts is considered to be too long and executors find it difficult to retrieve historical records where the transferor has not survived 7 years and in most cases raises little tax. The problem is even greater for gifts to trusts where you potentially require records for up to 14 years.

Taper relief is available for gifts made between 3 and 7 years prior to death. However taper relief and how it is implemented is not understood by most individuals.

Recommendation 2.

  • Reduce the 7-year period to 5 years. i.e. gifts to individuals become exempt after 5 years; and
  • Abolish taper relief

Recommendation 3.

  • Remove the need to take into account gifts made outside the 7-year period when calculating the IHT due (i.e. the ’14-year rule’).

Payment of IHT on gifts and NRB

Many individuals find calculating the IHT due on failed gifts difficult and are unaware of how the NRB is allocated for cumulation purposes. Furthermore, donee’s of the gift are unaware that they are liable to pay the IHT on failed gifts.

As a result, the recipient of a failed gift receives a lesser sum than intended by the donor of the gift.


Recommendation 4.

The OTS sets out 2 alternative options concerning the payment of IHT on gifts and the NRB; the reform option or the amendment option.

Reform option:

  • Any IHT due on failed gifts should be payable by the estate
  • The NRB should be allocated proportionately across the total value of all lifetime gifts with any remainder being available in the death estate

Amendment option:

  • The executors should be liable to pay IHT on lifetime gifts out of assets they handle and which are due to be distributed to the donee in question and if it is not possible to for HMRC to collect the money directly from the donee.

Interaction with CGT

The OTS conclude that the interaction between IHT and CGT is complex and can distort decision making.

Generally speaking, there is no CGT to pay on the death of an individual and a free uplift to market value is available for the person acquiring the asset. If that same asset qualifies for an IHT relief or exemption such as BPR/APR or spouse exemption, then there would be no IHT due.

It may therefore be more attractive to pass on such assets on death instead of making lifetime gifts on which CGT may be due.

Recommendation 5.

Where the IHT relief applies, the government should not allow a CGT uplift to market value. Instead the donee acquires the asset at the deceased’s historic base cost.

Business and Farms

Trading requirements, non-controlling shareholdings and FHL’s

The trading activity test for certain reliefs differs for CGT and IHT. This may impact whether to transfer a business or farm during life or on death. Aligning the trading activity test for BPR to that for gifts for holdover and ER reliefs would provide simplification.

A review of the non-controlling shareholdings in trading companies held indirectly should also be considered.

FHL’s are treated differently for income tax/CGT and IHT. Consideration should be given to whether to align the trading activity requirements for IHT treatment with that of income tax/CGT.

Recommendation 6.

The government should, as a package:

  • Review whether it is appropriate to have lower level trading requirements for BPR than holdover relief and ER;
  • Consider the treatment of indirect holdings in trading companies; and
  • Where FHL’s are treated as trading, align the IHT treatment with that for income tax and CGT, providing that certain conditions are met.

Limited Liability Partnerships (LLPs)

Corporate trading groups are not treated the same for BPR purposes depending on whether a company or an LLP is the holding vehicle.

Recommendation 7.

  • Review the treatment of LLP’s so that they are treated as companies for BPR purposes.

HMRC guidance

There are two areas which the OTS believed is unclear in the HMRC guidance or practice:

  1. Consider the APR treatment for farmhouses where the farmer leaves the farmhouse to go into care or for medical treatment.
  2. When is it necessary to obtain a valuation for Businesses and Farms.

Recommendation 8.

HMRC should review their current approach on the eligibility of APR on farmhouses in sensitive cases.

Recommendation 9.

The guidance should be clearer as to when a valuation for a business or a farm is required and whether this needs to be a formal valuation or an estimate.


There is disparity in the IHT treatment of life insurance policies held within a trust and those held outside of a trust.

Recommendation 10.

The government should consider allowing all death benefit payments from term assurances to be free of IHT irrespective of whether or not they are held in trust.

Anti-avoidance rules

There is concern that both taxpayers and advisors are confused by the anti-avoidance rules. POAT is complex and not well known. It is an income tax charge used to combat IHT avoidance which is confusing in itself. Furthermore, now that we have GAAR and DOTAS, it seems POAT may no longer be necessary.

Recommendation 11.

The POAT rules should be re-visited to consider whether they function as intended and whether they are still necessary.


The rest of the OTS report considers the following although no further recommendations have been made:

  • Grossing up provisions when gifts are made from estates to exempt and chargeable beneficiaries.
  • The equivalent of spouse exemption not being available to co-habiting couples or siblings.
  • Residence nil rate band and the very complicated downsizing provisions.
  • The tax rules relating to relevant property trusts.
  • Reduced rate of IHT (36%) where 10% of the estate is left to charity.


The OTS highlights how the exemptions limits have remained the same since the early 1980’s and it would be welcoming to see these limits being increased in line with inflation if the personal gifts allowance does not come into force.

Having different rules for whether BPR applies where a holding company holds a trading subsidiary or a trading LLP seems counterintuitive in these days when many professionals operate as LLPs, and we believe that this does warrant a review.  Additionally, having one definition for trading activity for CGT reliefs and IHT would make sense.  That said, increasing the 50% BPR test to match with the 80:20 test for ER/gift relief test seems unfair. Surely a 65% trade test would be a more reasonable compromise?

Overall, the review is welcome.  However, many of the more complex areas seem to remain unaddressed, which seems to defeat the object of the review.  The other question is whether the Government will have the time and appetite to actually consider implementing these recommendations given the other demands on their time, and if an election is called, whether any new government will have their own ideas for reform of this very complicated tax.

For further information, please contact the TaxDesk on 0845 4900 509 and ask for Reena Bhudia.