Can Regular Gifts Really Lower Your Inheritance Tax Bill? | Curtis Parkinson

Can Regular Gifts Really Lower Your Inheritance Tax Bill?

31 October, 2024 3 minutes reading time


Inheritance Tax (IHT) is a critical consideration in estate planning. While established strategies like utilising the nil-rate band and potentially exempt transfers (PETs) are widely employed, a lesser-known yet highly effective approach involves gifting from surplus income. This method presents a unique opportunity to manage IHT liability while proactively providing beneficiaries with financial support.

Advantages of Income-Based Gifting

PETs are subject to the 7-year rule and may become chargeable to IHT if the individual (known as the donor) passes away within that period. However, gifts made from income are immediately exempt. This distinction offers a compelling advantage. Regular gifts enable individuals to reduce their taxable estate and provide timely financial assistance to loved ones. By consistently gifting a portion of surplus income, a gradual reduction in the value of the estate can be achieved, culminating in substantial IHT savings over time.

Conditions for IHT Exemption

To make the most of this exemption, it’s crucial to understand (and meet) HMRC’s specific conditions:

1. Genuine Source of Income

The gifts must come from your regular income stream, including income such as your salary, pension, or dividends. Importantly, gifts from capital assets, like savings or property sales, are not eligible. They fall under different IHT rules.

2. Established Pattern of Giving

The gifts must appear as ‘normal expenditure’. This means you should make them regularly and consistently. Sporadic or one-off gifts may not qualify for this exemption.

3. Maintaining Your Lifestyle

After making these gifts, you should be able to maintain your current lifestyle comfortably. Maintaining financial stability after making the gifts is paramount to ensuring the exemption remains valid.

Optimising the Benefits

Utilising this strategy is inherently flexible. For example, individuals may establish a pattern of regular gifts to children or grandchildren to assist with educational expenses, property acquisitions, or ongoing financial support. Alternatively, contributions to a beneficiary’s pension scheme can be valuable, providing a long-term investment in a loved one’s future.

Furthermore, utilising surplus income to fund life insurance policies written in trust presents another effective strategy. This approach enables the provision of a substantial lump sum to beneficiaries upon the donor’s death while ensuring the proceeds remain outside of the estate for IHT purposes. 

Meticulous Record-Keeping

Comprehensive records of income and expenditure must be kept. These records indicate that the gifts originated from surplus income and did not impact the donor’s standard of living. This documentation is invaluable in substantiating the claim for exemption should the estate be subject to IHT scrutiny.

Our Advice

While gifting from income may seem straightforward, navigating the complexities of IHT planning can prove challenging. Seeking professional advice from an experienced lawyer and/or tax advisor is highly recommended. If you need advice or further information about gifting or other estate planning matters, such as wills or trusts, please don’t hesitate to contact us. We’re here to help.

Please note that all views, comments or opinions expressed are for information only and do not constitute and should not be interpreted as being comprehensive or as giving legal advice. No one should seek to rely or act upon, or refrain from acting upon, the views, comments or opinions expressed herein without first obtaining specialist, professional or independent advice. While every effort has been made to ensure accuracy, Curtis Parkinson cannot be held liable for any errors, omissions or inaccuracies.

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