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OTS Proposes Inheritance Tax (IHT) Reforms

The Office of Tax Simplification (OTS) has just proposed a second set of reforms to the inheritance tax (IHT) system, to make it easier for taxpayers to understand.  These include reducing the current seven-year period at which tax may be due on gifts to five years, and replacing various gift exemptions with a single allowance.Under the current rules, inheritance tax of 40% applies to estates above the value of £325,000 when a person dies.

Tax is also due on gifts an individual gives within seven years of their death, at a tapered rate depending on when they gave the gift.

Some gifts are exempt, including the first £3,000 given away each year, small gifts of up to £250, wedding or civil ceremony gifts, donations to charities and political parties, and regular gifts out of a person's disposable income.

The OTS said the seven-year period for gifts should change to five years, to reduce the workload on executors, and the tapering system should be abolished.

Afford Bond Partner, Paul Edwards commented: "The OTS also said the system of lifetime gift exemptions is very complex, and recommended replacing it with a single personal gift allowance, with an increased lower threshold for small gifts.  But the whole inheritance process remains complex so it is always best to seek expert advice at an early stage of any tax planning stages in life."

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