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Inheritance tax shake-up could see 'gifting' limit raised

Chancellor Philip Hammond says the current IHT system is “particularly complex” (REUTERS/Toby Melville)

A radical shake-up of inheritance tax laws could pave the way for more parents and grandparents to be able to “gift” money to children.

Chancellor Philip Hammond has ordered a review and some believe it could see money given to help younger family members buy a house free from tax, or at a very much reduced rate.

The Office for Tax Simplification has been asked to look at all aspects of IHT. Currently, just £3,000 a year can be “gifted” without incurring tax penalties – higher sums can be subject to 40% tax.

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That threshold has been in place since the early 1980s, when the value of an average home was about £24,000, way below the £226,000 of today.

Many parents and grandparents who can afford to help children with a deposit or to pay for a wedding run the risk of being hit by IHT rules.

Officials are set to examine all aspects of IHT, from submitting returns and paying tax, to making IHT-free gifts and estate planning.

There is, however, no indication on what may happen to the 40% “death tax”.

Many young people turn to parents or grandparents to help out with a house deposit (Getty Images)

The IHT nil-rate band of £325,000 (the amount which can be passed tax free) has been frozen since 2009 and will remain at this level until 5 April 2021.

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“This is long overdue,” said Nimesh Shah, a partner at accountancy, tax and advisory practice Blick Rothenberg, “but the review should not be restricted to IHT. The whole personal tax system and the way that we pay it is a mess and is in urgent need of simplification.”

He added: “With rising house prices over the last decade, more people are coming within the IHT net and it is vital that the system is looked at carefully and modified appropriately so that it is simplified and fit for purpose.

“People are confused about what their children and grandchildren will have to pay in IHT, and many have become concerned that their wills do not even reflect the current rules, which could mean their estates end up paying more tax.”

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In his letter, the chancellor says he is keen to see measures that “ensure that the system is fit for purpose and makes the experience of those who interact with it as smooth as possible”.

In the 2016/17 tax year, HM Revenues and Customs received £4.84bn in inheritance tax, £16m of which involved transfers of assets ranging from artworks to property, according to Hargreaves Lansdown.