With the threshold for inheritance tax (known as the ‘nil-rate band) being fixed at £325,000 since 2009, and inflation steadily rising, inheritance tax is becoming more and more of a concern for those with even modest estates.

At the rules currently stand, and subject to various exemptions and reliefs, an unmarried person with no children will pay inheritance tax at a rate of 40% on the value of their net estate over and above £325,000.00.

According to official statistics reported by HM Revenue & Customs, the total number of deaths in the United Kingdom resulting in a charge to inheritance tax has increased.

It is therefore not surprising that many people are considering making gifts to reduce the value of their estate on death.

The current inheritance tax rules provide that any gifts made within the 7 years prior to your death, will be taken into account and included in the value of your estate, unless they are subject to an exemption (such as gifts to a spouse or to charity)

One very useful exception to this rule is the making of gifts out of surplus income.

If your annual income is such that you have a surplus each year, after paying all outgoings, then you are able to make regular payments using this surplus income and such payments will be exempt from inheritance tax.

It is important to note that it is absolutely vital that meticulous records are kept as your Personal Representatives will be expected to provide HMRC with a detailed breakdown of your total income from all sources, total expenditure and total gifts made, for each relevant tax year.

HMRC provides a table in Schedule 403 to the Inheritance Tax Return which sets out the information your Personal Representatives will be asked to provide and it is advisable to collate all of this information and have it available on your death.

The rules concerning gifts out of income can be found in Inheritance Tax Act 1984 s21 which sets out that provided a disposition is made as part of a person’s normal expenditure, and that (taking one year with another) it was made out of his/her income and following the disposition the person is left with sufficient income to maintain his usual standard of living, then it will be immediately exempt from inheritance tax.

The important considerations are as follows:

‘Normal expenditure’ This is a subjective test, and the relevant question is what would be normal for the transferor, taking into account their level of income. It is expected that there is a pattern of gifting and therefore the payments must be regular and not one-off gifts

The payments must be of income and not capital

The transferor must be able to maintain his/her standard of living after making the gift(s), without having to utilise capital to do so

If you wish to discuss this further or explore other options available to you to mitigate your exposure to inheritance tax on your death, then please contact a member of the private client team at FMGS.

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