nEWS AND INSIGHTS

Tax, investments and pension rules can change over time so the information below may not be current. This article was correct at the time of publishing.

How to use the ‘normal expenditure out of income exemption’ to reduce your Inheritance Tax (IHT) liability

Gifting is a common strategy to reduce Inheritance Tax (IHT) liability by reducing the overall value of your estate over time. In most cases with large gifts, the donor needs to survive seven years after making the gift before the asset is exempt from Inheritance Tax.

A valuable Inheritance Tax exemption that is often overlooked when it comes to estate planning is gifting using normal expenditure out of income. There is no seven year rule for these gifts and it does not interfere with any other IHT exemptions.

What is the ‘normal expenditure out of income exemption’?

This exemption is using excess income to make regular gifts to your chosen loved ones. To qualify you must be able to prove that the gift was from income, prove it was part of the donor’s ‘normal expenditure’ and that the donor was left with sufficient income to maintain their standard of living.

The rules around this exemption are complex, so it is important to speak to a financial adviser to ensure that you are utilising the exemption correctly and keep accurate records to prove this as claims for this exemption are made upon the donors death. The records must prove that the donor could afford the gifts from their income, they will need to outline the donors expenditure each year to confirm it did not affect their standard of living.

What counts as income for this exemption?

In order to meet the criteria for the exemption, you must prove that the gift was made from your income. Income includes earnings, pensions, dividends, interest and rent.

Please note you may receive income from investments, yet this might not be considered as income, at Four Wealth Management, your financial adviser can advise you on your specific investments.

If you are self-employed or a business owner and your income fluctuates each year, HMRC will look at your records to establish the amount of excess income you had available.

How often do I have to make the gifts?

To qualify for the exemption, you must be able to prove that the gifts were regular. It cannot be a single gift.

Regular gifts can be anything you choose including contributing to a beneficiaries pension, paying into a trust, contributing to an ISA or JISA, sending money to your beneficiaries bank account or to regularly pay a bill or life insurance premium.

What is classified as ‘normal expenditure’ for the donor?

There is no legal definition of ‘normal expenditure’. It is unique to the donor not the average person and the donor must be left with enough income to maintain their current standard of living. The donor should not have to use any capital to meet their needs after making the gift.

Find out more about gifting from excess income

Contact us today on 0117 973 0500 to book a no-obligation financial review to discuss ways to mitigate your Inheritance Tax liability. The meeting can be at your home address or one of our offices in Bristol, London or Cirencester.

 

The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.

 

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If you have any queries or would like to arrange a face to face meeting with an adviser for a no obligation review of your personal finances, simply book a call back using the form below. Alternatively, you can call us on 0117 973 0500.

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