A little known but valuable inheritance tax exemption could be targeted by chancellor Rachel Reeves in the autumn budget amid reports that the government is looking at ways to raise more money from inheritance tax by tightening gifting allowances.
The ‘gifts out of normal expenditure’ is one of the most valuable but least known inheritance tax exemptions – which allows those with surplus income to pass on wealth through regular gifts.
More people are now gifting money to their families to minimise their inheritance tax burden ahead of changes announced in last year’s autumn budget which will see unspent pensions come within the inheritance tax net from April 2027.
To qualify for the exemption, gifts must be made from surplus income, on a regular basis as part of an individual’s ‘normal expenditure’ and they must be left with sufficient income to maintain their standard of living, without having to resort to capital.
There is no upper limit on the amount of money that can be given away using this exemption - it is dependent on the level of an individual’s income and their usual standard of living – making it popular with affluent individuals.
If the gifts meet the rules, they are not included in inheritance tax calculations even if the person making them dies within seven years.
Sean McCann, chartered financial planner at NFU Mutual, the financial advisory firm, said: “Currently, if you make regular gifts there’s no restriction on how much you can give away immediately free from IHT, provided it is out of your income and doesn’t impact your normal standard of living.
“This is likely to be in the chancellor’s sights in the forthcoming budget. With no upper limit, it currently allows those with high incomes to give away significant sums immediately free from IHT. Many wealthy grandparents use this to pay their grandchildren’s school fees and so the introduction of a limit or an abolition, coupled with VAT on school fees, would be a double blow.
“Many use the exemption to make outright gifts, put money into trust, or invest in pensions for younger members of the family. As the exemption isn’t claimed until after death it’s important to keep records of your income, expenditure and gifts,” he said.
Sean McCann added that that the form (Schedule IHT 403) available on HMRC’s website allows individuals to record their income, expenditure and gifts during their lifetime to ensure this task is not left to their families.
HMRC looks for a pattern of regular gifting out of surplus income and will examine the frequency and amounts of gifts.
Sean McCann said: “Gifts made on a regular basis such as annually or more frequently are more likely to satisfy the test. The first gift in a series can qualify even if you die shortly after making it, provided there is evidence that further regular gifts were planned. For this reason, it’s a good idea to send your loved ones a note with the first gift confirming your intention to gift regularly and keep a copy with your will.”
|
