Legal News | 7.09.23

The little-known IHT tool – gifting excess income

You may be aware that you can give away up to £3,000 per tax year with no Inheritance Tax (“IHT”) consequences.  You may also be familiar with the ‘seven year rule’: that if a donor survives seven years from the date of making a gift, the value of the gift will not be taken into account when calculating the donor’s IHT liability on their death. However, there is a further little-known exemption that can be used as a successful IHT mitigation planning tool, making gifts out of surplus income.

To be able to benefit from this exemption, a donor must be able to show that:

• The gift formed part of their normal expenditure – HMRC guidance suggests that they consider what is normal for the person making the gift, not for the average person.  The easiest way to satisfy this requirement is to establish a regular pattern of gifting;
• The gift is made out of income and not from capital; and
• After making the gift, the donor is left with enough income to maintain their normal standard of living – the gift must not leave them unable to support themself in the manner to which they are accustomed.

If a donor can satisfy the above three requirements, the gift will be exempt from IHT immediately, with no need to survive the gift by any period of time.

There is no limit to how much can be claimed as normal expenditure out of income and HMRC will look at each person’s individual circumstances when considering whether the above three requirements have been satisfied.  What is important is that the donor keeps detailed records of their income and outgoings, as well as any gifts they make each year.  These records will need to be submitted to HMRC following the donor’s death in order to support any claim for gifts from surplus income, so accuracy and completeness are essential.