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Lisa Moseley

Lisa Moseley

Associate

Regular Gifts from Surplus Income:  Could Your Unspent Income From Lockdown Help To Reduce Your Inheritance Tax Bill? 

During the lockdowns we have experienced over the last 18 months, we have not had the opportunity to do the things we would usually do or spend our money how we would under normal circumstances. Now that things are getting back to normal, it could be time to utilise some of the Inheritance Tax (IHT) exemptions available by making lifetime gifts to loved ones. 

If your estate is over the IHT threshold you may be concerned about IHT and be looking for ways to mitigate your estate’s tax liability. IHT is paid on the value of your estate exceeding the IHT threshold at a rate of 40%. For an overview of the inheritance tax allowances please click here.

Making gifts during your lifetime and utilising the exemptions available is a way of reducing your liability to IHT. 

A particularly useful way of gifting for those who have surplus income is to make gifts out of this income to loved ones. Provided that the gifts meet the necessary criteria, they can be exempt from IHT. 

In order for this exemption to apply, the gifts must be made from surplus income and not from capital, therefore you must be able to demonstrate that the gift forms part of your normal expenditure and be able to maintain your usual standard of living without dipping into your capital. 

Income can include earnings from employment and pensions, interest, dividends and rental income. Regular withdrawals from a bond however are not classed as income. 

Surplus income is that which is left over after payment of your outgoings and normal expenditure sufficient to maintain your usual standard of living.

You must be able to demonstrate that the gifting is part of your normal expenditure, and you should also establish a pattern to the gifting. The most usual example of a gift out of surplus income would be a gift of cash. You could set up a standing order direct to your recipient’s bank account in order to establish a pattern. You could make monthly or annual gifts to children or grandchildren and there is no limit to the amount you can gift provided that it does not exceed your available surplus income. 

This is a useful exemption as it is not necessary to survive the gift by 7 years as with other types of lifetime gifting. 

It is an exemption which your Executors claim after your death when dealing with the administration of your estate. It could be difficult for your executors to gather together the necessary information to claim this exemption, therefore keeping records of your gifts is essential. A record of your usual income and outgoings would also be helpful. If possible, a record of your income and outgoings for the two tax years prior to your first gift should be retained as HM Revenue & Customs usually considers that surplus income becomes capital after two years. We recommend that you complete HM Revenue & Customs’ form IHT403 and keep it with your important papers as this will ensure that you retain the necessary information your executors would need to claim this exemption. 

It would also be a good idea to write a letter which you could store with a copy of your Will at home. The letter would need to state your intention to make regular gifts out of surplus income, who you wish to make the gifts to, the amount and frequency of the gifts. 

For individual advice and assistance please contact our Wills, Trusts and Probate Team to find out how we can help.

This is not legal advice; it is intended to provide information of general interest about current legal issues.