Could the IHT seven-year rule on gifts be cut to five?

At present, when someone dies within seven years of passing on money, property or possessions to loved ones, tax of up to 40 per cent must be paid.

However, the Office of Tax Simplification (OTS) has recently suggested that this deadline should change to five years.

According to an official review ordered by the chancellor, the seven-year rule on gift-giving should be cut to five years, meaning gifts made more than five years before would be exempt from inheritance tax (IHT).

IHT has been named Britain’s ‘most-hated tax’ even though, less than 25,000 estates are liable each year, which is less than five per cent of all deaths.

Under the current regime, if there is tax to pay on gifts it is charged at 40 per cent on those given in the three years before the individual dies, while those given three to seven years before death are taxed on a taper relief.

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

Furthermore, the OTS called for the confusing array of gift exemptions to be replaced with a single personal gift allowance, allowing an individual to give up to a fixed amount each year.

Kathryn Cearns, who chairs the OTS, said: “Although only a small number of people pay inheritance tax each year, a far greater number worry about it. The OTS’s packages of recommendations would go some way to achieving the goal of making the tax easier to understand and simpler to comply with.”