There are many confusing and complex ways to avoid inheritance tax (IHT), most people overlook gifts when searching for ways to save on IHT even though it is one of the simplest options. When used properly, there are no fees to pay or forms to fill out.
-The gift must be part of the donor’s normal expenditure.
It is a subjective test – it is necessary only to be “normal” for the donor (not just for the general public). The critical element is the requirement of an established pattern; the payments don’t have to be of the same amount. For example covering university fees or paying for rent on behalf of their child for their first flat. The gift can be used to avoid Inheritance Tax providing that the gift does not benefit the donor; a father cannot, for example, gift money to their son on the terms that the son builds the father a loft extension.
-The gift must be from the donor’s income.
For the gift to be exempt from Inheritance Tax, it must come from excess income (salary, dividends from shares, interest from deposit accounts etc.) as long as such income has not been reinvested in a capital asset, it should retain its character as income.
It is not necessary that the income previously stated should be taxable as such – it may be exempt from income tax (e.g. income from ISAs).
-The donor must still carry on their usual standard of living after making the gift.
Whilst there is no specified maximum amount which can be gifted, the donor must still be able to carry on their usual standard of living.
There is no minimum amount of time the donor has to survive after the gift to the specified person; and there are no requirements on who can receive the gift.¬
When an individual has more income that they need to maintain their current lifestyle, to avoid inheritance tax on the excess income, they are able to make gifts before they pass. The tax authorities still have requirements that these gifts must follow for them to be exempt from inheritance tax. When the donor does pass, his/her personal representatives (executors or administrators of his/her estate) can claim the Inheritance Tax back from these gifts on condition that they were made following the rules stated above.
If you ever have any doubts or questions on whether or not the gifts you have made, are making, or are going to make will avoid inheritance tax, then please do not hesitate in contacting Dean Steele, on 01722 410009.(By accepting free advice you are under no obligation to use our services).