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Inheritance Tax (IHT) is a tax levied on the value of a person’s estate when they die and the value of gifts made during their lifetime. However, certain exemptions and reliefs are available to reduce the IHT liability. One such exemption is the “regular gifts out of income” exemption. This exemption applies to gifts from the donor’s surplus income and is part of their everyday expenditure. For a gift to qualify for the regular gifts out of income exemption, it must meet three conditions as outlined in the HMRC guidance (IHTM14231):
- The gift must be made out of income.
- The gift must be part of the donor’s regular expenditure.
- After making the gift, the donor must be left with sufficient income to maintain their usual standard of living.
Example: Suppose John has an annual income of £80,000, and his normal living expenses amount to £50,000. He decides to gift £10,000 annually to his daughter to help with her mortgage payments. Since the gift is made from John’s income, it forms part of his normal expenditure, and he still has sufficient income to maintain his usual standard of living. In this case, the £10,000 gift would qualify for the regular gifts out of income exemption and would not be subject to IHT.
There is no specific monetary limit for the regular gifts out of income exemption, and it is not restricted to gifts made to family members. Gifts can be made to any individual, trust, or organization if they meet the exemption criteria. Regarding time limits, regular gifts out of income are exempt from IHT immediately, with no need to survive for seven years, unlike potentially exempt transfers (PETs). PETs are lifetime gifts that become exempt from IHT only if the donor survives for seven years from the gift date.
When the donor dies, the personal representatives of their estate must report the regular gifts out of income to HMRC. Form IHT403 (Gifts and other transfers of value) provides details of the gifts, the income they were made, and evidence that the gifts meet the exemption criteria.
In conclusion, the regular gifts out of income exemption can be a valuable IHT planning tool, allowing individuals to make tax-free gifts during their lifetime, provided the gifts meet the specified conditions. However, it is essential to refer to HMRC guidance and keep accurate records of gifts and income to ensure compliance with the exemption criteria.
You can call us to discuss your personal circumstances with our specialist tax advisors.