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INHERITANCE TAX SAVING TIP

View profile for Peter Jackson
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Normal Expenditure out of Income Exemption

An underused but effective Inheritance Tax exemption is the normal expenditure out of income exemption.  It may be the case that an individual has income which exceeds their reasonable requirements, and is not needed to maintain their usual standard of living.  If that income remains in their Estate it would simply accumulate and form part of the capital of their Estate at the date of their death.  If their Estate is subject to Inheritance Tax then that accumulated income will be taxed at 40%.

If a pattern of regular gifting out of that surplus income can be established then those gifts can be free of Inheritance Tax and would not affect other more common exemptions (e.g. the annual exemption of £3,000).

In order to qualify for this exemption the following conditions apply:-

  1. The gifts have to be part of “normal expenditure”.  What this means is that it should be clear that there is a settled intention to make regular gifts over a period of time.  Typically this may be best evidenced by way of a letter to the recipient indicating, for example, “I have decided to make you a regular gift of £x per month/year out of my surplus income”.
  2. The gifts must actually pass to the recipient.
  3. The gifts must come out of the Donor’s income.  They cannot be made out of the Donor’s capital assets.  A standing order from a bank account would be good evidence of the amount and regularity of such gifts.
  4. After allowing for any such gifts the Donor must be shown to be left with sufficient income to maintain their usual standard of living.

The exemption is one that is claimed by the Executors of the Donor after death.  It is therefore important for there to be clear documentary evidence of the payments and a full record of the same.

Please contact our Private Client Department to discuss this and other Inheritance Tax exemptions.  We are always happy to advise on Estate planning generally.