Gifts out of income

One question which always gets asked: How can I reduce inheritance tax on my estate when all my capital is tied up? One answer to that question is that if you can afford it then you can make lifetime gifts of capital.

Table of contents

Gifts out of income

Making gifts from your income to avoid Inheritance Tax

One question which always gets asked: How can I reduce inheritance tax on my estate when all my capital is tied up? One answer to that question is that if you can afford it then you can make lifetime gifts of capital. This is one of the most effective IHT planning strategies.

Potentially exempt transfer (PET)

If you are in this situation and have already made use of the annual and small gift exemptions, then you might be limited to only being able to make a gift of capital, which is gifts from your income and then hope to survive the dates of making the gifts by at least seven years so that the gifts will fall out of the estate at death for IHT reasons.This gift can be made directly and so is classified as a potentially exempt transfer (PET) or a gift into a trust which is classified as a chargeable lifetime transfer. The two types of gifts are taxed in different ways, so experienced advice is required.

Normal expenditure out of income

To be able to improve this position, you can arrange affairs so that the exemption for ‘normal expenditure out of income’ can be claimed on death. This is done by making gifts from your income that you consider you do not need to maintain your standard of living.For you to be able to qualify then, your expenditure must be normal or habitual. It must be made out of income and after all outgoing costs, including the transfers, you must be able to demonstrate that there is no change in your standard of living.

Gift regularity

Should you decide to use these gifts out of income method. It is essential for the intention to make the gift regular and routine is recorded. This could mean using standing order arrangements or a letter of intent for gifts that are made annually. Besides, the gifts should be of the same value as the regular payments that are made and should there be any changes to the amount gifted, the reason for the change must be recorded.

IHT form 403

To determine whether the second and third conditions have been met, HMRC expect your trustees or executors to give a lot of detail of your income and expenditure in the years before your death which would be entered on the IHT form 403. Income includes all types of income, whether it is taxable or not.The expenses will include amounts which can be easily determined, for example, mortgage or utility bills but will also include items which cannot be easily identified, such as holidays or travel. The surplus of income over expenditure is then compared to the value of gifts which the exemption is being claimed. This is to determine whether the gifts were made out of income rather than capital.

Summary

If you hope for the estate to benefit from the exemption, then you must keep everything well documented to ensure the personal representatives have the best chance of success and don’t submit an incorrect claim. Like all IHT planning it is essential to get experienced advice before starting any Inheritance Tax mitigation planning. Please contact us for help and advice in this area.

Join our Newsletter

Subscribe and get the latest updates about inheritance tax and Estate Planning into your mailbox.

We help people with over £1 million in current assets pay ZERO in UK inheritance tax

One stop comprehensive specialist advice - Tax, financial planning and legal advice service with 18 years experience.

What our clients say
Read our 118
    
reviews

"It is gratifying to finally come across an adviser who gives sensible ongoing advice which is very client focused."

Frank Hibberd

Retired gentleman

"It is nice to know that we can now be certain that our daughter will inherit our money without giving a large slice of it to the government ."

Tony & Sue Perriss

"Everyone's situation is different but having an initial discussion with Charles has really helped me personally navigate what can be a daunting subject."

Bobby Chadda

"I particularly want to thank you for the open and transparent manner in which you have serviced my tax planning needs since I first met you seven or so years ago. In arranging my tax planning through you, I have confidence"

Michael Mahon

Retired gentleman

"Charles was really helpful from the outset and quickly clarified our situation for us... I have used Bluebond for  IHT and other tax advice and they have been very helpful with both. Charles is a very experienced and knowledgeable individual and I highly recommend Bluebond's services."

Sam Attenborough

Retired gentleman

I have used Bluebond for setting up a discretionary trust for my children as well as inheritance tax and estate planning for my home and  other properties. Having searched for years, it was only after meeting and speaking with Charles that I felt confident enough to take these next steps, and I'm very glad I did. His ability to explain complex issues in simple terms and walk you through every step of the process is quite simply unparalleled.

Imran Qureshi

Excellent and comprehensive advice concerning all things financial in one place. Enthusiastic, Educational, Expert, value oriented, Professional and Polite are adjectives that come to mind as well as great attention to detail.

Deirdre Buckley

Inheritance tax is a minefield. Charles de Lastic of Bluebond Tax Planning is the best in the business at helping you to chart the path that is right for you to ensure your estate is structured in the most tax efficient manner.

Nicholas Dickinson

Charles provides clients with valuable insights that clearly demonstrate expertise built over the years. Charles and his team guided us through a estate planning journey and then addressing complex Inheritance Tax matters. They have been very transparent with their advice and cost. Overall an excellent service. Highly recommended

Shailesh Karia

The information contained in this web site is for UK consumers only.  Like most firms of solicitors and accountants, Bluebond Tax Planning is not regulated by the FCA. The content of this website does not constitute FCA regulated financial advice and all content is provided for general information purposes only. Bluebond is not responsible for any action you may take as a result of information on this site. All advice will be delivered on a personal basis once we fully understand your situation and our client agreements have been signed.

Copyright © 2024 Bluebond.co.uk
-
Copyright Notice
-
Legal Disclaimer
-
Terms & Conditions
-
Privacy Policy