OTS Inheritance Tax review: our initial reactions

Keen-eyed readers may have spotted that on Friday the Office of Tax Simplification (“OTS”) published their report on “Simplifying the design of Inheritance Tax” (“IHT”).

The report should be approached with some caution.  It’s not a consultation report setting out the UK Government’s intentions: it’s a report setting out the thoughts of an independent body tasked with thinking about ways in which tax can be simplified.

Government usually initially reacts to such reports with a variation on “Thanks very much.  We’ll think about it and let you know.”  What matters in practice is what the Government’s considered response turns out to be; and we won’t know that for a while yet.  Planning on the basis of the OTS report is premature: but being aware of it isn’t.

Subject to that caveat, it’s worth looking at what the OTS has to say.  We summarise the main suggestions below.  Interestingly, although some pass muster as “simplification”, others do seem to stray into policy decisions that have little or nothing to do with simplification.  For full details, the report can be found here.

  • There is too much complexity around the various rules affecting lifetime gifts and their interaction. In particular the exemption for “normal gifts out of income” is identified as suitable for reform or abolition (and replacement with a higher annual personal gift allowance).
  • In computing IHT on death, gifts should be ignored if made more than 5 years before death (in place of the current 7 years); but the “taper relief” for gifts made more than 3 years before death (which relief, as the OTS point out, is widely misunderstood) should be abolished.
  • The rules for allocating the nil rate band between death estate and pre-death transfers which become chargeable on death should be reviewed, as should the persons liable for tax on such pre-death transfers.
  • On death, assets should not, as now, be universally re-based for Capital Gains Tax (“CGT”) purposes. Instead, this should happen only if and to the extent that there is an actual charge on death to IHT.  There should thus be no CGT re-basing on, for example, assets left to a spouse or civil partner or assets qualifying in full for Business Property Relief (“BPR”) or Agricultural Property Relief (“APR”).
  • At present, the level of trading activity required for BPR is lower than that required for CGT Gift Relief or Entrepreneurs’ Relief (“ER”). On the other hand, furnished holiday lettings often qualify for ER but seldom for BPR.  It’s suggested that alignment between the taxes would be desirable.  OTS also questions the policy intent behind giving BPR on shares traded on the Alternative Investment Market.
  • HMRC should review their current approach to the eligibility of farmhouses for APR in sensitive cases, such as where a farmer needs to leave the farmhouse for medical treatment or to go into care.
  • Death benefits from term assurance fall into the estate of the deceased and are potentially chargeable to IHT unless someone has had the foresight to write the policy in trust. OTS sensibly see the need to set up a trust as “jumping through hoops” and recommend that term assurance benefits should by default be outside the charge to IHT.
  • Given the existence of the rules on Gifts With Reservation, General Anti-Avoidance and the Disclosure of Tax Avoidance Schemes, OTS are sceptical about the continuing need for a separate “Charge to income tax by reference to enjoyment of property previously owned” (aka Pre-Owned Assets Tax: usually referred to as to “POAT” though the acronym might equally well stand for “Paranoia Over Avoiding Tax”…). It’s suggested that it’s not well understood and should be reviewed to consider whether it functions as intended and is still necessary.

The above is of necessity only a brief summary of what seem to us the key features of the 103-page report.  For more details, please get in touch with us using our enquiry form. You can also find out more about our IHT expertise on our estate & inheritance tax planning page.



Sam Inkersole

In 2022, Sam won the Taxation’s Rising Star award at the Taxation Awards in and was named in the Accountancy Age 35 Under 35.

Jon Wedge

While Jon’s client work focuses on the financial services sector, he also oversees the firm’s assurance service, as well as supporting the trainees following in his footsteps.


Elana joined us in 2017 as an ACA trainee, after graduating from Durham University where she had studied languages. She is now a manager in our assurance team.


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