By Steven Pinhey, Tax Director
Did you know that if you are fortunate enough to have surplus disposal income, there is a little known exemption from inheritance tax (IHT)? It can be used to pass income to people you want to help on a regular basis i.e. towards a child's rent or mortgage payments.
As long as the gifts are made regularly out of income, there is no limit on the amount you can give and no 7-year rule applies.
However, as with other exemptions that the taxman gives us, there are a few conditions to satisfy for the exemption to apply. These are that the gift:
- forms part of your 'normal' expenditure
- was made out of income; and
- leaves you with enough income to maintain your normal standard of living
In this context, 'normal' means what is 'standard, regular, typical, habitual or usual' for you and only you, not the average person in the street. Therefore, each case has to be considered on its own specific merits.
Made out of income
This condition is reasonably straightforward in as much as the regular gifts must be made out of income and not capital. This can sometimes cause a problem for older people who may have become 'asset rich' over time but 'income poor' due to low interest rates and pension levels etc. Therefore, the relief is particularly useful to wealthy individuals with substantial private income.
Standard of Living
The third test is that you must leave yourself with sufficient income after making the gift to maintain your 'usual standard of living'. How this is measured will vary from one person to another as some people have a more extravagant lifestyle than others. Notwithstanding their income levels, the surplus income is dependent on normal living expenses at the time the gift was made.
The above is a brief summary of the conditions needing fulfilment before this very useful exemption will work.
If you would like to discuss how you may be able to use this exemption or want more advice on how to minimise your inheritance tax exposure, feel free to speak to your contact partner or Steven Pinhey on 020 7490 7766 or email email@example.com.