For many people, giving financial support to family members is an important part of their financial planning.
Whether it is helping children with pension contributions or providing ongoing assistance, gifting can play an important role in Inheritance Tax (IHT) planning.
The normal expenditure out of income exemption under Section 21 of the Inheritance Tax Act 1984 can make qualifying gifts immediately exempt from IHT, provided the conditions are met.
What are the requirements?
Under Section 21, gifts can be exempt from IHT if they are part of a person’s normal spending habits, are paid from their income and leave them with enough income to maintain their usual standard of living.
This exemption only applies to gifts made from surplus net income, not from capital or savings.
For example, withdrawals from an investment bond or the capital part of a purchased life annuity payment would not qualify.
The donor must also be able to cover their normal living costs from their remaining income and cannot give away income and then use capital to make up any shortfall.
Why is record-keeping important?
As the exemption is often claimed after death, clear records are essential. Executors commonly support the claim through forms IHT400 and IHT403, which ask for details of gifts and include space to analyse regular gifts made from income.
Clients should keep evidence of annual income, normal expenditure and the gifts made, including bank statements or schedules showing that the gifts were affordable from surplus net income.
Where gifts are made outright to individuals, they are usually treated as potentially exempt transfers unless another exemption applies. This means they do not normally need to be reported to HMRC when they are made.
If the donor dies within seven years, the personal representatives will usually include details of the gifts on the IHT400 and IHT403 as part of the estate reporting process.
The IHT100 is generally reserved for chargeable lifetime transfers, such as certain transfers into trusts, or other chargeable events where IHT is immediately payable. It should not be confused with the reporting of ordinary outright gifts to individuals.
If gifts qualify as normal expenditure out of income, they are exempt immediately and do not need to rely on the seven-year survival rule. If the exemption is claimed after death, the executors will need records of income, expenditure and gifts to support the claim.
How can we help?
Planning for IHT helps to safeguard your family’s future, as utilising vital allowances enables you to minimise your IHT contributions.
Our team of accountants can support you with gifting out of income so that you can provide for your family’s future.
Get in touch with our team for support with Inheritance Tax planning.
