Unrecognized tax exemption allows for increased gifting of funds to offspring without inheritance tax concerns
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In the pursuit of minimising inheritance tax (IHT), couples who share finances can implement a strategic approach to gifting out of surplus income. This method, permitted by HMRC, allows regular gifts to be exempt from IHT, provided they meet certain conditions [2].
To qualify, each individual must ensure that their gifts are made from their own surplus income after maintaining their usual standard of living. This means that the gifts must be made regularly, come from income (not capital), and the donor must be left with sufficient income to cover their normal expenditure [2].
For HMRC purposes and appropriate allocation of income and expenditure, each spouse or civil partner should track their own income and usual living costs separately to identify their individual surplus income available for gifting. Gifts should be made individually from each person’s surplus income to qualify for the exemption. Documenting these gifts clearly (e.g., with bank transfers or gift letters) helps demonstrate that gifts arose from income and were regular [2].
It's important to avoid using capital/assets for gifting under this exemption, as gifts from capital do not qualify. Couples can utilise other IHT allowances independently such as the £3,000 annual gift exemption per individual, small gifts up to £250 per person, and wedding gifts up to respective limits (e.g., £5,000 to a child), allowing them to reduce their combined IHT exposure further [1][3].
Establishing a regular pattern of gifting helps demonstrate that the gifts are part of normal expenditure rather than one-off transfers. The first gift in a series can qualify even if the donor dies shortly after making it, provided there is evidence of further regular gifts planned [2].
Good record keeping is essential, including evidence of income, expenses, and the gifts themselves, clearly showing that they were made from surplus income. Working with a tax adviser is strongly recommended to assess income streams, allocate expenses fairly, and ensure that all documentation is in place to support the exemption [4].
As more estates are expected to be subject to IHT in the coming years due to frozen tax-free thresholds and the inclusion of pension pots from April 2027, it's crucial for couples to consider these strategies to minimise their IHT liability [5].
References:
[1] gov.uk, Inheritance Tax: Gifts, [Online], Available: https://www.gov.uk/inheritance-tax/gifts
[2] gov.uk, Inheritance Tax: Gifts out of income, [Online], Available: https://www.gov.uk/inheritance-tax/gifts/gifts-out-of-income
[3] gov.uk, Inheritance Tax: Wedding and civil partnership gifts, [Online], Available: https://www.gov.uk/inheritance-tax/gifts/wedding-and-civil-partnership-gifts
[4] gov.uk, Inheritance Tax: When to get professional advice, [Online], Available: https://www.gov.uk/inheritance-tax/when-to-get-professional-advice
[5] gov.uk, Inheritance Tax: Rates, bands and thresholds, [Online], Available: https://www.gov.uk/guidance/inheritance-tax-rates-bands-and-thresholds
- Seeking financial advice can be beneficial when investing one's surplus income, as it allows for a more strategic approach to personal finance, such as minimizing inheritance tax.
- In addition to regular gifting from surplus income, it's crucial to make the most of other allowances, like saving annually up to £3,000 per individual, to further reduce one's combined inheritance tax (IHT) exposure.
- To ensure their financial future, it's essential for couples to consider pension planning, as from April 2027, pension pots will become subject to inheritance tax.
