For many people, giving financial support to family members is an important part of their financial planning.
Whether it is helping children with pension contributions or providing ongoing assistance, gifting can play an important role in Inheritance Tax (IHT) planning.
The normal expenditure out of income exemption under Section 21 of the Inheritance Tax Act 1984 allows for gifts to be made without being chargeable for IHT purposes, if specific conditions are met.
What are the requirements?
Under Section 21, gifts can be exempt from IHT if they are part of a person’s normal spending habits, are paid from their income and leave them with enough income to maintain their usual standard of living.
This exemption only applies to gifts made from surplus net income, not from capital or savings.
For example, withdrawals from an investment bond or the capital part of a purchased life annuity payment would not qualify.
The donor must also be able to cover their normal living costs from their remaining income and cannot give away income and then use capital to make up any shortfall.
Why is record-keeping important?
As the exemption is usually claimed after death, it is important to keep clear records of any gifts made under the normal expenditure out of income rules. Good record keeping is therefore paramount as the individual is not there to provide further proof and argue the case should HMRC scrutinise the claim made.
HMRC form IHT403 includes a schedule that can be used to record these gifts as they are made and can help support a future claim. Records can therefore be kept using this form on an ongoing basis.
How can we help?
Planning for IHT helps to safeguard your family’s future, as utilising vital allowances enables you to minimise your IHT contributions.
Our team of tax advisors can support you with gifting out of income so that you can provide for your family’s future.
Get in touch with our team for support with Inheritance Tax planning.
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