Director London +44 (0)20 7131 4448
5 May 2017
A flexible way to mitigate inheritance tax exposure
Gifting money is often thought of in terms of large single outright gifts and the seven year inheritance tax (IHT) rule. However, regular gifts out of income can be exempt from IHT and provide a more flexible way to mitigate death duties.
The ‘Normal Expenditure out of Income’ exemption may be an interesting option for grandparents, parents and spouses looking to make regular cash gifts to their family while reducing the value of their estate for inheritance tax (IHT) purposes.
To use this exemption you make a series of gifts out of your after-tax income. If you satisfy the conditions, the gifts are exempt from IHT as soon as they are made and you do not have to survive for seven years. The exempt gifts also do not cut into your nil rate band.
If your circumstances change, you can stop the gifts without losing the exempt status of those you have already made. Particularly for this reason, this exemption is often more appropriate for many than a single large outright gift.
The Normal Expenditure out of Income exemption has the following three key criteria:
It is important to know that HMRC may not assess the validity of the exemption until after your death. We advise all those considering this exemption to ensure that they have taken advice, documented their intention to make regular gifts out of income and that donors keep a running record of income and expenditure.