Published Autumn / Winter 2011

Many people know that if they give away an asset, and survive for 7 years, then that asset is outside their estate for IHT purposes.

However, fewer people know about the exemption for regular gifts out of surplus income. In this case the gifts are immediately exempt and there is no requirement to survive 7 years. This is quite separate from the annual allowance of £3,000 for each donor (plus whatever is unused of the previous year’s allowance).

Gifts made out of income can be exempt if:

  • They are made regularly (at least once a year); and
  • The Donor has sufficient income to support his or her lifestyle even after making the proposed gifts.

What is meant by “surplus income”? As a rule of thumb, this means income on which income tax is payable. Thus withdrawals from insurance bonds are excluded. It has to be genuinely surplus, ie you can’t spend your income in gifts and then live off withdrawals of capital. You have to have income above what is required for your living expenses.

So, what is “regular giving”? There has to be a settled pattern of giving. The classic examples of gifts within this exemption are the payment of school fees for grandchildren, or the payment of life assurance premiums. However, less frequent giving, such as annually, is acceptable, provided a settled pattern can be shown. In addition, the amount does not have to be fixed – it could be a figure accumulated through the year in a deposit account, for instance. Even if the donor dies after only one or two gifts, the exemption may be claimed if a firm intention to make regular payments can be shown.

After the Donor has died, HMRC will require the executors to declare the Donor’s income and expenditure in the relevant tax years (up to seven years prior to the date of death). The income is not usually a problem since it can be found in the Donor’s tax returns. However, expenditure is more difficult. We usually give clients who are making such gifts a copy of the relevant form and suggest it is completed as they go along, saving their executors a difficult job.

The income exemption is extremely useful, particularly for older clients who may find they cannot spend all their income and who have younger relatives who would really benefit from such gifts.

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