The Office of Tax Simplification (“OTS”) has recently published their second report following the review of Inheritance Tax (“IHT”) which included 11 recommendations. These recommendations can broadly be categorised into three areas, namely, lifetime gifts; interaction with Capital Gains Tax (“CGT”); and IHT reliefs associated with businesses and farms. Some of the key recommendations have been summarised below.

Lifetime Gifts – time limits and taper

When an individual makes a gift to another individual for IHT purposes this gift is only a Potentially Exempt Transfer (“PET”) because it is necessary for the donor to survive seven years from the date of the gift to be completely free of IHT. If the donor does not survive the gift by seven years the IHT that may be chargeable is reduced on a sliding scale (known as taper relief) depending on how long they survived.

At the time of death, obtaining information relating to gifts made seven years ago can be difficult as it is difficult for executors to obtain bank statements and other financial records more than six years old.

Furthermore, the application of taper relief is complicated and not understood properly – it is a reduction in the tax payable not a reduction in the value of the PET.

OTS therefore recommends that taper relief should be abolished and shorten the survivorship period from seven to five years.

Lifetime Gifts – normal gifts out of income

Another significant reform that was included in the report relates to exemption for normal expenditure out of income. Where an individual has excess income, they can gift that excess income free of IHT if a pattern can be established.

OTS recommends either this relief is reformed to reduce the administrative burden in calculating the excess income. One of their suggestion is to limit the amount of income to a fixed percentage based on the most recent tax return.

The alternative recommendation is that the relief is abolished altogether and replaced with a higher personal gift allowance. OTS has not suggested a limit but a £25,000 personal gift allowance apparently covers the value of 55% of all normal expenditure out of income claims.

Interaction with CGT

Currently, when an individual inherits assets on death, these assets benefit from a market value uplift for CGT purposes so that the inherent gain is wiped out. The reason for this uplift is to mitigate double taxation on the basis that the asset would be subject to IHT on death. Therefore, the individual inheriting the asset does not pay CGT in relation to the growth in value associated with the asset whilst it was previously owned by the deceased.

The capital gains uplift applies to all assets and therefore it also applies to assets that would not otherwise be subject to IHT by virtue of certain exemptions. These exemptions could include spouse exemption, or other IHT reliefs such as Business Property Relief (“BPR”) and Agricultural Property Relief (“APR”). Where assets qualify for IHT reliefs, the recipient of the inheritance would inherit the asset free of IHT and is potentially able to sell the asset with no CGT. This circumstance gives rise to zero taxation.

The OTS mentions in their report that the CGT uplift on death distorts decision making when it comes to giving assets away. This is because, if an asset qualifies for IHT relief, it is usually more beneficial for the individual to pass these assets on death to benefit from both the IHT exemption and the CGT uplift.

The OTS therefore recommends removing the CGT uplift for assets that benefit from IHT exemption so that the recipient acquires the asset with the original acquisition cost of the deceased.

IHT reliefs

Many business owners and farmers have relied on a form of IHT relief called Business Property Relief (BPR) and Agricultural Property Relief (APR) when planning to pass their business to the next generation. One of the main conditions for BPR to apply is that the business must be wholly or mainly trading. This test considers a trading business to be one where its trading activities is greater than 50%.

For CGT purposes, when an individual gives away or sells their business to a third party, they may qualify for CGT reliefs such as gift relief or Entrepreneurs’ Relief. To qualify for such reliefs, the business must also qualify as a trading business. However, unlike BPR, to qualify for CGT reliefs the bar for assessing the trading activities is higher as it is necessary for the business to be substantially trading which HMRC suggests is greater than 80%.

OTS recommends that the Government should consider whether it is appropriate for the business test to be different for IHT and CGT.


It is still early days whether these recommendations may be introduced as law but they are certainly suggestions the Government will consider in an attempt to simplify the IHT regime. This can only mean that changes are afoot and it will be necessary to consider the impact on an individual’s estate and review one’s Will. Please get in touch with your usual contact for further details regarding the above or information relating to the other recommendations contained in the report.

If you have any queries on IHT, please speak to your usual Campbell Dallas advisor.

Aileen Scott
0141 886 6644

The information in this article should not be regarded as financial advice. This is based on our understanding in August 2019. Laws and tax rules may change in the future.