With the potential inclusion of pensions in the taxable estate from 2027, Inheritance Tax receipts are set to increase significantly.
This is driving a corresponding increase in demand for estate planning advice. One area which has seen a particular uptick in activity has been gifting and especially gifting out of income exemption. This stems largely from concerns about pension funds becoming subject to Inheritance Tax and a desire from some who intended to use their pension savings for wealth transfer purposes rather than as an income.
There are obvious benefits to this exemption. Firstly, the gift will be outside the estate immediately with no seven-year clock. Secondly, the amount gifted is only limited by the donor’s surplus income.
However, there are some downsides to the exemption too. The exemption can generally only be claimed on death meaning there is uncertainty at the time of gift that all the conditions for a successful claim have been met.
For the exemption to apply the gifts must:
- form part of normal expenditure
- be made from income
- leave the donor with sufficient income to maintain their usual standard of living
These are clearly open to a degree of interpretation and with no guarantee that gifts will qualify, it is often best to err on the side of caution rather than push at the boundaries of HMRC acceptability. In this insight we examine the most common questions about the exemption.
Normal expenditure
When is a gift regarded as ‘normal’ expenditure?
Gifts will usually be made in cash and must form part of a habitual pattern of gifting. This can be shown from the history of gifts made by the donor. Typically, HMRC will look at a history of say three or four years to establish a regular pattern. Sometimes a shorter period may be accepted where it can be shown that the donor had made a commitment to future gifting, such as paying the premiums on a life policy or setting
up a standing order.
….Read the full article in our Autumn Wise Words newsletter