If you would like to help your family financially during your lifetime, it is natural to ask where that leaves you for Inheritance Tax (IHT). One relief is well worth knowing about: a gift that is normal expenditure made from income is exempt from Inheritance Tax.
Here is how the relief works, the conditions a gift has to meet and some examples of the kind of giving it covers.
How the relief works
There are three things to understand about the relief before looking at the conditions.
It is unlimited
There is no set cap on the amount you can give. The relief is subject only to your levels of spare income.
It does not apply to gifts of capital
The relief is for gifts made from income. It does not apply to gifts of capital, and the normal IHT limits apply to those.
It covers gifts to individuals and to trustees
The relief applies to lifetime gifts, and those gifts can be made to either individuals or trustees.
The three qualifying conditions
There are three qualifying conditions for the relief to apply. A gift must:
- Be made from income. Some carry forward of excess income from one year to another is allowed.
- Be part of the donor’s normal expenditure.
- Allow the donor to maintain their standard of living without dipping into capital.
The donor is the person making the gift, and all three conditions need to be met.
Examples of typical giving
These are some typical examples of giving out of income:
- A regular allowance. You pay a regular allowance to your family members out of your excess taxed income.
- Rental income you do not need. You let one of your properties and do not require the rental income, so you give this to your granddaughter.
- A bonus or dividend that is surplus to your needs. You receive a large bonus or dividend that is surplus to your needs, and you give it away by making cash gifts to family or friends.
In each case, the gift comes from income that the person giving it does not need.
Keep a record of your giving
It is important to document your giving to ensure that it receives the correct tax treatment when you are gone.
The reason is a simple one. The tax treatment of your gifts is settled at a time when you are no longer here to explain them, so a clear record helps to show that they met the conditions above.
Need more information?
Whether the relief applies depends on your own circumstances: your income, your normal expenditure and your standard of living. Please contact us for further information. Call us on 01202 311 311 or get in touch.
Common Questions
Is there a limit on how much I can give?
The relief is unlimited, subject only to your levels of spare income. It does not apply to gifts of capital, where the normal IHT limits apply.
What conditions does a gift have to meet?
There are three. The gift must be made from income, be part of the donor's normal expenditure, and allow the donor to maintain their standard of living without dipping into capital.
Who can the gifts be made to?
The relief applies to lifetime gifts made to either individuals or trustees.
Do I need to keep a record of my gifts?
It is important to document your giving to ensure that it receives the correct tax treatment when you are gone.
