Making tax free gifts

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:

  1. Gifts must come from your annual net surplus income i.e. any monies leftover once you have deducted income tax and all expenses, such as household bills.

  2. Your gifts must be made regularly so that they become part of your normal expenditure. It is important to keep accurate records of all your outgoings so that you can show that these gifts form part of a regular pattern of giving. As it may take a few years to build up evidence of a pattern, it’s advisable to draft a letter, clearly setting out your intentions to make regular gifts each year to one or more named individuals.

  3. As the donor, you must be able to maintain their current standard of living i.e. the gifts mustn’t impact your ability to meet your day to day expenses.

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.

 

 

Subscribe to Family Wealth Management

 

 

 

The latest insight in personal financial planning, tax and investment strategies

 

Download the PDF

 

Contact us

Andrew Cunnington profile image
Andrew Cunnington

Partner London +44 (0)20 7131 4448

Contact us

Nick James profile image
Nick James

Director Bristol +44 (0)117 376 2101

Contact us

Lee Webster profile image
Lee Webster

Partner Salisbury +44 (0)1722 431098

Family Wealth Management Spring 2017 articles

Pension funding changes

Pension funding changes: How will your retirement be affected?

Since 6 April 2016, individuals who have ‘adjusted’ income for a tax year of greater than £150,000 have had their annual allowance for making pension contributions in that tax year restricted.

ISA rules

ISA rules revamp aids retirement saving options

The shake up of the ISA regime brings huge opportunities for tax efficient savings. What are the changes and how will they help you?

Family trusts

Trusts - Is the crusade over?

Why family trusts still have a role to play in helping you reduce your inheritance tax exposure.

Probate fees

What do probate fees and Making Tax Digital have in common...?

Both Making Tax Digital and probate fees have been impacted by the election process. This has provided welcome pause in which to reflect on the crucial details that will effect businesses and private individuals. 

May market analysis

May Investment Outlook

An overview of global and regional equity markets in April and May 2017 - Markets show signs of losing patience with Trump and we look at the impact of current events in the UK and French elections.

Powers of Attorney

Lasting powers of attorney

Julia Abrey, head of elder law at Withers LLP, discusses the two types of lasting power of attorney, and why it’s vital to have them in place.

Smith & Williamson websites use cookies. Find out about cookies here. By continuing to browse this site you are agreeing to our use of cookies.