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How to save Inheritance Tax – Part 3
So far in this series on Inheritance Tax (IHT) I have talked about gifts being made, and making use of the annual allowance, small gifts exemption, gifts in contemplation of marriage or potentially exempt transfers. The common factor linking all of these types of gifts is that they are gifts of capital.
IHT is a tax designed to be levied against the capital value of your estate, it is not designed to be a further tax on your income; that is what income tax deals with!
Accordingly, if you are in the fortunate position of having a good level of income, and are accumulating that income, with the result that the value of your estate is increasing, then now may be the time to consider giving away some or all of that surplus income.
There are a number of conditions that need to be met to be able to make use of this exemption.
Firstly, the gifts must be made from income. Income will include any earnings, such as salary, pension income, bank interest, dividends or distributions on investments, rental income and other taxable income. It would include interest and dividends within ISA’s, but it will not include withdrawals from bonds, which are treated as a repayment of capital.
If you are able to satisfy yourself that you are giving away income (or more precisely satisfy HMRC) then the next criteria to meet is to ensure that you do not reduce your standard of living simply to create the surplus. All of the costs of living need to be deducted before you work out the surplus. HMRC’s form, IHT403 – page 6 sets out details your executors will need to make the claim. It is incredibly helpful if you are going to rely on making such gifts, for you to complete the paperwork and record keeping contemporaneously, rather than leaving it to the executors and family to deal with at a later time.
The third criteria is for there to be a regular pattern of giving, which means that “one off” gifts are unlikely to be covered. Such a pattern might be giving away the same amount every year to set individuals, or a proportion of the surplus income. Alternatively, it might be by making set gifts of specified amounts, but changing the individuals, provided they are within a similar class, such as grandchildren.
If you are able to meet the three criteria then such gifts will fall outside the realms of Inheritance Tax as soon as they have been made. There is no requirement for such gifts to be survived by 7 years, nor do they impact on any of the annual allowance or small gift exemption, previously discussed.
As you can imagine, this is potentially a very valuable relief and record keeping is of paramount importance.
For specific advice on Inheritance Tax matters, please contact Richard Horwood, Head of the Private Client team.
Please note the contents of this blog are given for information only and must not be relied upon. Legal advice should always be sought in relation to specific circumstances. Longmores Solicitors LLP are not regulated by the Financial Conduct Authority and are not authorized to provide any form of financial advice.