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Legal News | 2.05.24

IHT exemptions: gifts out of surplus income

Following on from the last couple of newsletter articles on fiscal drag and its potential impact from an inheritance tax (IHT) perspective, now is a good time to think about the IHT exemptions that can be utilised to reduce any potential IHT bill. One of those is the little-known exemption of making gifts out of surplus income. There are certain conditions that need to be met to benefit from this exemption, so if you’re hoping to make use of this exemption it makes sense to do some forward planning to ensure that your gifting meets the conditions required.

Lifetime gifts made from capital within 7 years of the date of death are likely to be subject to IHT (unless they meet an exemption, for instance, the gift is to charity). However, lifetime gifts made from surplus income will be instantly exempt from IHT and will not form part of the donor’s estate for IHT purposes.

To benefit from this significant exemption, the following requirements need to be met:

  1. The gifting forms part of the donor’s normal expenditure. The most effective way to meet this requirement is to form a regular pattern of gifting;
  2. The gifting is made from surplus income and not from capital; and
  3. The donor is able to maintain their usual standard of living even after making the gifts.

HMRC will consider whether the conditions above have been met on a case-by-case basis. Consequently, it is very important that the donor keeps detailed accounts of the gifts they make each year, as well as their income and expenditure, as this information will need to be submitted to HMRC following the donor’s death to support a claim for the exemption.  You cannot find out in advance whether you have secured the exemption, and so leaving records for your personal representatives is a very good idea.

For further information on inheritance tax or estate planning, please get in touch with your usual Wansbroughs’ contact or email the Private Client Team at wealth@wansbroughs.com.

 

Posted By Our Wills, Tax, Trusts & Probate Team