Gifts of Surplus Income
Retaining surplus income year on year will not improve your IHT position as it forms part of your estate and you may be liable to IHT on your death. Gifting this income away will qualify you for an immediate exemption from IHT providing:
- the gifts were made as part of your normal expenditure, and
- the gifts were made out of income, and left you with sufficient income, year on year, to maintain your usual standard of living.
“Normal” is not defined, but for the purposes of the exemption is taken to mean “typical” or “habitual”. HM Revenue & Customs (HMRC) have made it clear that there is no rule of thumb and that each case will be judged on its merits although HMRC will look very closely at your standard of living. The test of normality requires a settled pattern of expenditure to be established although a single gift can qualify as “Normal” provided there is written evidence of an intention to make further gifts.
The amount you give away each year can change as can the person you are giving it too. A formula or standard can be used to determine the amount to be gifted. For example, the cost of a sick dependant’s residence at a nursing home or a commitment to pay all, or part, of a grandchildren’s school fees.
When assessing expenditure HMRC will only consider your specific expenditure and not what an ordinary person might have spent in similar circumstances. It is, therefore, vital that you retain adequate records of expenditure for this purpose, including bank statements showing the relevant payments made.
Made Out of Income
Income is not defined for the purposes of the exemption, but it is essential that the gifts are made from income as opposed to capital. The exemption cannot in any circumstances, therefore, apply to gifts of chattels, such as a car or jewellery, or of stocks or shares unless you bought them out of income specifically for the purposes of a gift.
Sufficient Income to Maintain Your Standard of Living
This will depend upon your specific circumstances. It is your standard of living at the time of the gift that is relevant. It is vital that the gift must not force you to resort to capital to meet your ordinary living expenses.
The Relief in Practice
The burden is on you to show HMRC that the exemption is due. Relief is not granted automatically unless the facts are obvious. HMRC, in all but the most straightforward of cases, will require a full statement of the facts. As the relief only becomes relevant if you die within seven years of making the gifts it is crucial that you maintain adequate records for your Executors as it will be, they who will claim the relief following your death. It is also worth noting that there is no limit on the amount of relief available.
These notes have been prepared for the purpose of an article only. They should not be regarded as a substitute for taking legal advice.