Gifts out of Surplus Income and Saving Inheritance Tax (IHT)

Inheritance tax (IHT) is usually troubling to those that are affected by it. I know many who had hoped that the new administration in government would increase the current thresholds (£325,000 or £650,000 for a couple/ 2010) fixed by the last administration for a 5 year period.

The trouble with inheritance issues is that if you are thinking of gifting capital away, what will happen to you if your needs grow as you get older and need care as an example. Also, any significant gift of capital over £3,000 (the annual gift allowance) may well become subject to the 7 year survival requirements. You can still go back one year if you have not used the annual gift allowance and gift away £6,000 in total in the first year. It will be interesting to see if any of the above regulations change in the forthcoming budget on the 22^nd June 2010.

One allowance which is usually overlooked and can offer significant potential to provide inheritance savings is the gift out of surplus income rule. This is effectively a regulation that allows an individual to gift away surplus income without effecting their standard of living or using capital to subsidise their income after the gift is made. The HMRC website suggests that this is: ‘that after allowing for all gifts forming part of their normal expenditure the transferor must have been left with enough income to maintain their usual standard of living.’ Further details are available at their website, www.hmrc.gov.uk and add the further note that ‘The usual standard of living will generally be the standard prevailing at the time of the transfer. You may still apply the exemption if the transferor has had to lower their standard of living for some extraneous reason, such as the loss of employment or drop in income on retirement.’

In using this allowance, past test cases suggest that if the gift was made on a regular basis, almost a commitment to pay, that this will help demonstrate the objectives of the regular gifting.

This can be a complex allowance and each case needs to be calculated carefully, however, in some cases, this option can be highly valuable in allowing the value of an estate to be capped by giving away surplus income that might have otherwise been accrued and eventually subject to inheritance tax.

Contact Churchouse Financial Planning Limited for further information on 01483 578800 or at www.churchouse.com.

Churchouse Financial Planning Limited is authorised and regulated by the Financial Services Authority.