IHT planning: gifts from surplus income
If an individual makes gifts out of their surplus income, they can qualify for an unrestricted exemption - making inheritance tax planning very valuable. But how can they demonstrate their intention to HMRC?
Recap
Among the most valuable inheritance tax (IHT) planning stategies is the concept of making gifts from surplus income. Where HMRC accepts that a gift is made from surplus income, it is immediately exempt from iIHT - meaning there is no seven-year clock, and it doesn’t use up any of the nil-rate band. Contrast this with the rather measly £3,000 annual exemption, and it's easy to see why it is potentially very valuable.
Surplus
To be accepted as being made from surplus income, the donor needs to be able to demonstrate that they were able to afford the gift without diminishing their capital or standard of living. However, there is a further condition that must be met.
Regular
Gifts must be an intended part of normal expenditure; normal for the donor, not the average person. What HMRC wants to see is a regular pattern of such gifts and evidence of it. This is relatively straightforward if such gifts have been made year on year, but what if the donor dies after making only a couple of gifts?
Letter of intent
It's prudent for the donor to write a letter signalling the intention for the gift to form part of a regular pattern of giving when they make the first payment. That way, if they were to die after only making a single gift their executors can point to the letter as proof of the intention. This should prevent HMRC from being able to challenge the gift and charge IHT on it.
Our template letter can be used for this purpose. The letter should be completed where required and send it to the intended executors - not to HMRC.
Related Topics
-
HMRC reminds employers about payrolling benefits deadlines
HMRC is reminding employers of key dates and preparations ahead of the transition to real-time payrolling of benefits in kind (BiKs). With an important voluntary registration deadline approaching, what do payroll teams need to know?
-
Why do frozen mileage rates affect VAT?
Your business pays a fixed mileage allowance to staff who use their private cars for business travel. The rates published by HMRC have been frozen since 2011 but is this relevant to determine how much input tax you can claim on the payments?
-
HMRC restarts direct recovery of tax debts from bank accounts
HMRC has resumed use of its Direct Recovery of Debts (DRD) powers, enabling it to recover unpaid tax directly from the bank accounts of businesses and individuals who have ignored repeated attempts to settle outstanding liabilities. What does this mean in practice for business owners and directors?
This website uses both its own and third-party cookies to analyze our services and navigation on our website in order to improve its contents (analytical purposes: measure visits and sources of web traffic). The legal basis is the consent of the user, except in the case of basic cookies, which are essential to navigate this website.