Inheritance Tax: gifting to family, a valuable but often underused exemption

Published: May 2022

Inheritance Tax (IHT) contains many exemptions and reliefs.  The key exemptions which are applicable only to lifetime gifts are:

• Annual allowance of £3,000
• Small gifts exemption of up to £250
• Gifts in consideration of marriage
• Normal expenditure out of income

The normal expenditure out of income exemption, often referred to as ‘gifts out of surplus income’, is probably one of the most valuable but most underused exemptions.

Inheritance Tax (IHT) legislation affords immediate exemption to regular gifts if, when taking one year with another, it can be shown that transfers were:

• made out of income, and
• after the gift, the individual had sufficient net income to maintain their usual standard of living, and
• the gifts are normal gifts

Normal expenditure means expenditure that, when it took place, was part of the settled pattern of expenditure adopted by the individual.

A ‘settled pattern’ can be shown over a period of time or by showing that the individual has assumed a commitment, in relation to future expenditure and has then made gifts in accordance with that commitment.

There is no fixed period of gifting required to establish the relief and each gift does not have to be of the same amount or to the same person each time.

Tax planning does not disqualify the exemption – almost the reverse.  If an individual can show that they have entered into a series of gifts have taken advice, and intend to use the relief, this will help when claiming the relief.

Individuals who wish to make use of the exemption should keep financial records calculating and offsetting expenditures against income.  Tracking the opening and closing balances on monthly bank statements is the usual starting point.  It is also helpful to record a memorandum of intent, declaring a future intention to make regular gifts from excess income.

Estate and tax planning is a complex area and getting professional advice can ensure common (and costly) mistakes are avoided.

If you would like further information, please do not hesitate to contact us on 01223 23333.

Disclaimer
Opinions constitute our judgment as of this date and are subject to change without warning. The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your original investment.

Past performance is not a reliable indicator of future results and forecasts are not a reliable indicator of future performance. Where an investment involves exposure to a foreign currency, changes in rates of exchange may cause the value of the investment, and the income from it, to go up or down.

The information in this article is not intended as an offer or solicitation to buy or sell securities or any other investment, nor does it constitute a personal recommendation.

Tax and estate planning is not regulated by the Financial Conduct Authority.