There is no upper limit on the amount that an individual can give away during his or her lifetime (although an immediate charge to Inheritance Tax may arise where an amount over and above the available Nil Rate Band is placed into Trust).
In most cases, for the purposes of calculating an individual’s Inheritance Tax (IHT) liability, monies given away remain within the estate for 7 years. Assuming the donor survives for at least that period, the gift becomes exempt from IHT.
However, certain gifts are exempt from IHT at the outset. The most common exemption is the annual gift exemption of £3,000. This exemption allows an individual to give away up to £3,000 per tax year, without any IHT implications. Furthermore, where the previous tax year’s allowance has not been used (but the current tax year’s allowance has), this may be carried forward and used in the current tax year.
Other common exemptions include;
- Gifts to Registered Charities: Unlimited
- Gifts in consideration of marriage/civil partnership:
- £5,000 from a parent to a child
- £2,000 from a grandparent to a grandchild
- £1,000 from any other person
- Small gifts exemption: Gifts of £250 to an unlimited number of people
A less commonly used, often overlooked, exemption is the ‘normal expenditure out for income’ exemption. This valuable exemption applies where a gift meets the following conditions:
- It forms a regular pattern/part of a person’s normal expenditure
- It is made out of income
- It leaves the person with enough income to maintain their normal standard of living
Gifts qualifying under the above exemption are immediately exempt from IHT. They do not impact upon any of the other exemptions and subject to the donor having sufficient income left over to maintain their standard of living, there is no limit on the amount that can be given away in this manner.
Details of any gifts made for IHT mitigation purposes should always be recorded and retained. This is particularly important where the normal expenditure out of income exemption is to be claimed as proof is required that the qualifying criteria have been met. In particular, an account of the donor’s income and expenditure should be kept, in order to demonstrate that the gifts are being made from genuine surplus income.
It is not acceptable, for example, for an individual to give away their income each year and then utilise their savings to meet day to day living expenses. In this instance, the annual gifts would not qualify under the normal expenditure out of income exemption.
Alternative IHT mitigation strategies:
Giving money away is not always a suitable solution for mitigating IHT, particularly where a person does not wish to lose access to their savings, or the income from them.
There are currently a number of Trusts within the marketplace which offer IHT advantages, but still allow access to the gifted capital and/or an income in some form.
In order to assess your potential liability to IHT and discover suitable solutions please contact Springfield Financial Services Ltd on 01772 729742.