You may well be aware that you can give away £3,000 in any tax year with no IHT consequences. Many people do this, some every year and others year by year as their financial position permits.
Far fewer people are aware of another exemption that can be very useful in managing the likely IHT position of their estate, and that is making gifts out of income.
This can be used in numerous ways, for instance:
- Paying the premiums on a life policy that will pay out a sum calculated to meet an expected IHT liability. Such policies are normally written into trust so the sum paid out does not form part of the deceased’s estate, and the insurance company will likely pay before probate is granted;
- Grandparents meeting grandchildren’s school fees or other expenses;
- Funding an ISA or pension for someone else;
- Simply helping boost someone’s else’s income and standard of living, or perhaps contributing towards an annual holiday.
As with several other tax planning strategies, the devil lurks in the detail and everyone’s circumstances will be unique. But nonetheless we can make some general comments about using this exemption.
- It is easier to claim this exemption successfully for regular or repeated gifts. The Inheritance Act itself refers to “normal expenditure out of income”. So when assessing a claim for this exemption HMRC will want to see evidence that the deceased was making the gift or gifts regularly or consistently, or had committed to doing so in future;
- The gift must have been out of the deceased’s income. So if HMRC sees a gift has been made from capital this exemption will be denied, though the same gift may still be permitted under a different exemption or relief;
- A gift is not necessarily assessed only against the deceased’s income in the same year. HMRC will look at levels of income in previous years, especially if someone’s income fluctuates. There are no hard and fast rules on this but HMRC will usually only look back over a relatively short period;
- The gift must have left the deceased with enough income to maintain their standard of living;
- Record keeping is key. Executors claiming this exemption will have to satisfy HMRC that all (not some or most of) its conditions are met. They will struggle to do this if the deceased’s records are patchy at best, or the executors may have to give much time and effort to collating information that was not readily to hand. We will often suggest that a client keeps records on the HT form the executors will have to use to claim the exemption once the client dies, so the information is easily to hand in the format HMRC wants;
- There is no limit to the size of gifts that can be successfully claimed under this exemption. Each person’s circumstances will be unique and some may be able to gift away substantial sums.
- Anyone acting as attorney or court appointed Deputy for someone who lacks the mental capacity to make gifts themselves must take professional advice, as strict limits are imposed on what can be given away.
If any of the above is of interest to you please contact us HCprivateclient@herrington-carmichael.com or call us +44 (0)1276 686 222
This reflects the law at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought as appropriate in relation to a particular matter.
