Can you explain when the ‘normal expenditure out of income’ exemption applies with regard to making gifts free from inheritance tax?
Phil Carroll,Tax and Estate Planning Manager at Skandia, replies:
You can reduce the value of your estate, and therefore the amount of inheritance tax (IHT) you are liable for, by giving some of it away before you die. Everyone can give away £3,000 per tax year free from IHT. Once this has been used, you can also utilise any unused allowance from the previous tax year. A further exemption is available where gifts are classed as ‘normal expenditure out of income’.
To benefit from this exemption, the gifts need to made regularly (every Christmas or birthday, for example) and out of true income, whether from employment or from dividends or interest from investments. Provided that once you have made these gifts you are left with sufficient income to maintain your usual standard of living, they should be exempt from IHT.
There is no upper limit on the amount that can qualify for this exemption. However, you need to be aware that the exemption itself can only be confirmed on your death, so it’s important to keep clear records of income and expenses in order to make any future claim a lot easier.
Your financial adviser will be able to offer further information on how to claim the exemption and how it can fit within wider planning to move more funds outside of your estate for IHT purposes.
The responses given here are general in nature and may not be suitable for all investors. Please see your financial adviser to find out which is the most suitable approach for your own needs.