Regular gifts, when they can be classified as ‘normal expenditure out of excess income’ can fall under a valuable exemption which helps mitigate inheritance tax (IHT).
For this IHT exemption to apply, it needs to be shown that the gift(s) represent part of the donor's normal ('usual') expenditure taking one year with another and the gifts do not affect the donor’s standard of living.
The donor needs to be left with enough net disposable income after tax to live on after making the gift without resorting to drawing on their savings. The amount could be based on a formula or a calculation but importantly, a pattern of regular giving needs to be in place. The gift does not need to be made every year, but there needs to be a clear commitment in place.
Examples
Gifts that can fall under this exemption include:
monthly or other regular payments;
regular gifts e.g., for Christmas and birthdays, or wedding/civil partnership anniversaries; and/or
regular premiums on a life insurance policy
Maintenance payments
Other Considerations
'Intention' is key for the exemption to succeed and that intention must be put into effect; it is no good just saying that you will be giving someone payments, either a series of payments must be made to show a pattern or, better still, the intention should be in writing. A formal letter from donor to donee (or parent of the donee if a minor), preferably witnessed, and the first payment made would usually be sufficient proof.
There is no set time span over which the taxpayer must show the pattern of giving. HMRC prefer to see a series of payments made over a period of three or more years but there isn’t necessarily a minimum time period.
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Please contact us to find out how the above applies in your circumstances and how you can reduce your tax liabilities and maximise your tax efficiency.
Please note that the above is for general information only and does not constitute financial or tax advice. You should not rely on this information to make or refrain from making any decisions. You should always obtain independent professional advice in respect of your own situation.
