Regular gifts out of income: cut your inheritance tax bill by giving your money away!

by John Fitzsimons on 19 April 2012  |  5 comments
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Guest blogger Carl Lamb, managing director of IFA Almary Green, looks at how to make the most of your gifting allowances in order to cut your inheritance tax bill.

There is a simple way to cut your inheritance tax liability - give your money away!

Gifting rules allow for each individual to give away up to a total of £3,000 each year plus any number of small gifts of up to £250 per person per year. Wedding gifts are also exempt; parents can give up to £5,000 each to the happy couple, grandparents up to £2,500 and anyone else up to £1,000. In addition, there are other gift exemptions such as gifts to charities or political parties.

This may not be sufficient to reduce your estate to below the Nil Rate Band – the first £325,000 of your estate which is currently free of inheritance tax liability – but there is another, less well-known, gift allowance that might help.

Gifts out of income

The “regular gifts out of income” allowance permits those who have surplus income – as opposed to capital assets – to establish a pattern of giving. However, there are some strict rules controlling this type of giving and the donor must meet certain criteria for their gifts to qualify.

It’s therefore never too late to start a pattern of regular gifts, provided there is surplus income available.

The importance of record keeping

Secondly, good record keeping is essential to provide evidence not only of the gifting pattern, but also to prove that the gift came from income rather than from capital.

This means that the donor must be able to supply evidence of all income and expenditure incurred in the tax years in which the gifts were made. On the death of the donor, HM Revenue & Customs will certainly want to see this evidence before accepting that the gifts are exempt.

The income under scrutiny will be anything that counts as income on your self-assessment tax return. So that will include any salary, income from self-employment or partnerships, pension income including the state pension, rental from properties and all income from savings and investments, including dividends. Capital gains on the sale of assets or investments won’t quality, nor will withdrawals from existing savings vehicles.

This allowance is just one of a raft of measures that can help to reduce your potential inheritance tax liability including a number of trusts and discounting schemes. Protection plans are also available to help cover any remaining liability. Inheritance Tax is largely avoidable: don’t get caught out!

Carl Lamb is managing director of IFA Almary Green

What are you doing to minimise your inheritance tax bill? Are the inheritance tax thresholds too low? Let us know your views via the comment box below