When planning your estate, one effective strategy to reduce your potential Inheritance Tax (IHT) liability is making gifts out of income. This approach can be particularly beneficial for clients looking to pass on wealth without impacting their standard of living.

What are classed as gifts out of income?

Gifts out of income refer to regular, habitual gifts made from your surplus income rather than your capital. For these gifts to be exempt from IHT, they must meet specific criteria set out by HM Revenue and Customs (HMRC):

    1. Regularity: The gifts must form part of your normal expenditure, be habitual and consistent over time.
    2. Source of funds: The gifts must be made from your income, not from your capital or savings.
    3. Standard of living: Making the gifts should not affect your usual standard of living.

What are the benefits of making gifts out of income?

    1. Immediate IHT exemption: unlike other gifts that may be subject to the seven year rule, gifts out of income are immediately exempt from IHT provided they meet the necessary criteria.
    2. Efficient use of surplus income: This strategy allows you to make effective use of surplus income, potentially reducing the size of your taxable estate and ultimately the amount of IHT your family will have to pay.
    3. Flexibility: You can make these gifts to any individual or organisation, including family members, friends, or charities.

Key points:

    1. Documentation: You will need to keep detailed records of your income, expenditure, and the gifts made. Details of the recipient, date of gift, amount of gift, and purpose of the gift are essential. This information will be required by your Executors after your death to prove to HMRC the gifts are eligible for IHT Exemption.
    2. Regular review: Regularly review your financial situation to ensure that the gifts remain affordable and do not impact your standard of living. Remember the gifts have to be made from surplus income.
    3. Seek professional advice: Consult with a suitably qualified professional to ensure that your gifting strategy aligns with your overall estate planning goals and complies with HMRC requirements.

Examples of gifts:

    • Monthly allowances: to provide a monthly allowance to a child or grandchild.
    • Annual subscriptions: to pay for annual subscriptions or memberships for family members.
    • Regular donations: to make regular donations to a favourite charity.

Comment

Gifts out of income can be a powerful tool in your estate planning, helping to reduce your IHT liability while allowing you to support loved ones or causes you care about. By understanding the rules and maintaining proper documentation, you can make the most of this exemption and ensure your estate planning is both effective and compliant.

If you have any questions or need personalised advice please get in touch with us or if you require financial advice contact our Investment Management team.

 

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