Inheritance Tax: Gifts Out Of Income A Very Valuable Relief
As long as you can maintain your usual standard of living ...
Posted by Helen Beaumont on 16/11/2022 @ 8:00AM
Out of all the tax reliefs and exemptions, probably the most generous of them all is the Inheritance Tax (IHT) exemption for 'normal expenditure out of income'. This is because it has very few limitations ...
As always, when it comes to Inheritance Tax, good record keeping on your part keeps HMRC happy!
What limitations it does have are very broad, made up of your individual circumstances, and the amount of surplus income you could give away. To satisfy the conditions, ensure that:
The gift was part of your own normal expenditure
It was made out of your own income
You had money left over to maintain your usual standard of living
So, good so far! That all seems to be pretty straightforward, yet in practice, everyone's circumstances vary wildly, so it can often be difficult to determine whether the exemption can be applied.
"HMRC apply the rules rigidly!"
However, with the right tax advice, you can be sure that all the conditions are met and the 'normal expenditure out of income' exemption can apply, sheltering significant gifts as far as IHT is concerned.
Normally, a gift, say between a father and daughter, is a Potentially Exempt Transfer (PET) as far as Inheritance Tax is concerned, only becoming exempt if the donor survives for seven years.
By contrast, if the exemption circumstances are met, the seven-year waiting period does not apply, but expect HMRC to seek to clarify if the exemption was satisfied if the donor dies within seven years.
Let me give you an example:
Doris is 85 and her net income after tax is £54,000 per year. This is made up of both pensions and investment income. She lives modestly and has been able to save £2,500 per month for some time.
She makes regular gifts of £1,500 per month, split between her two adult grandchildren. As long as HMRC accepts these regular gifts met the exemption criteria, she could still make use of her annual IHT exemption in respect of other gifts.
HMRC will look for patterns over a number of years to establish if the gifts are eligible or not. It is possible to shorten that period providing you have sufficient documentation to prove it. Regular gifts are more likely to meet the criteria than one-offs.
"It is important to distinguish surplus income from capital!"
Be careful here. If you gift more than your income in a year, HMRC would see that as capital because you would not be left with sufficient income to maintain your usual standard of living.
As always, good record keeping on your part keeps HMRC happy.
Until next time ...
HELEN BEAUMONT
Would you like to know more?
If anything I've written in this blog post resonates with you and you'd like to discover more, it may be a great idea to give me a call on 01908 774323 and let's see how I can help you.
Helen brings the personal tax planning experience of the top 20 tax companies to Essendon. Formerly of MacIntyre Hudson (with 45 offices nationwide), Helen worked at Chancery for more than 10 years before joining Essendon as the personal tax specialist.
Tax Planning can make a considerable difference to your tax liability. Helen has specialist knowledge and experience in tax planning and uses every opportunity to minimise your tax bill is utilised. By analysing your investments, income, profit and expenditures, Helen will provide strategic tax planning expertise that could offer significant savings, whilst delivering clear, honest advice and guidance.
When Helen is not at Essendon she spends time with her young son and likes going on long walks with the family dog.
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