Gifting out of excess income to save on Inheritance Tax – are you making the most of your financial position?

Due to the freeze on inheritance tax thresholds announced by Chancellor Jeremy Hunt announced in the Autumn Statement 2022, a record number of estates are now liable to paying tax, which is charged at the rate of 40% on the sum above any available allowances. As reported in my earlier article when the Autumn Statement was released (To gift or not to gift? The impact of the Autumn Statement on Inheritance Tax – Buss Murton Law), the nil-rate band allowance has been at the same level since 2007, which is grossly disproportionate compared to the rate of inflation. In light of this, consideration should be given during a person’s lifetime as to other inheritance tax exemptions may be available to their estate.

The gifts out of excess income exemption is least known, but those who can make use of it stand to save a considerable amount in inheritance tax. The exemption, permitted by s21 Inheritance Tax Act 1984, allows for a person to gift their surplus income and can stop their inheritance tax liability growing on a month by month basis. Recent statistics have reported that in the last year, only 430 families used this “loophole”. This is an extremely small number given those who may have been able to benefit from this exemption if they only sought appropriate advice in this regard; however, the combined total saved across the 430 families of £67 million – on average therefore, the successful claim of this exemption saved approximately £156,000 per family. This saving would have almost certainly been gratefully received by the families given the significant sum of money involved and the pressures of the cost of living crisis.

As with any form of inheritance tax planning, seeking advice is crucial; whilst this exemption is available where a person receives an income that is surplus to their requirements, there are strict criteria in terms of the type/repetitive nature of the gift. A strong threshold of evidence also needs to be provided to HMRC on the person’s death to assess their eligibility before awarding the exemption, which should be considered by the giftee during their lifetime so as to assist their Executors – not least as one would need to carry out an exercise to determine what income they receive and offset their expenditure before being able to ascertain what is, indeed, the “excess”. Taking appropriate timely legal advice as opposed to the true cost of not taking such advice could result in available exemptions being lost, or the chances of a successful claim for any gifting exemptions to be applicable to the estate may become improbable.

Gifting is a rather complex area of law, and it is recommended that professional advice is sought during your lifetime – if you spend a little on legal advice, you may stand to save your family a lot, both in respect of the financial pressures of a significant tax burden, and from the administrative pressures of trying to piece together the position on your death. If you would like further advice from Buss Murton in this regard, please contact 01892 510222 to speak to a member of the Private Client Team.