How Can Executors Successfully Claim Inheritance Tax Exemption from Gifts?

Year Published: 2020

It is commonly known that if you give away assets in your lifetime, you must survive 7 years before the gift falls outside your estate and would qualify for inheritance tax exemption. A less well-known relief allows you to make regular gifts, provided it is out of your surplus income, which would not fall within the 7-year survivorship rule.

Conditions for Inheritance Tax Exemption

Some conditions must be met in order for the exemption from inheritance tax to apply, these include:

  • The sums gifted must be made out of surplus income and therefore the person making the gift must still have enough income to maintain their standard of living
  • The sums must be part of the normal expenditure of the person making the gift, so there must be the intention of making a pattern of gifting

Therefore, in order to qualify, the person making the gifts must have enough income sources, which would include pensions, interest and dividends, rental income and other earnings. However, care needs to be taken when reviewing the sources available as some receipts may be deemed to capital and not income, which would mean that they would not qualify. For example, 5% withdrawals from life assurance bonds.

You may find that in one year you do not have enough income to cover your outgoings; for example if your income fluctuates, you have larger expenditures in any one year or perhaps you need to pay for care as you get older. HMRC may still allow gifts to qualify taking one year with the next, if your outgoings and income vary.

The gifts must be regular in nature and a single gift would not qualify unless it is part of an intended pattern of gifting. You may, therefore, want to leave a letter with your Will to confirm that it is your intention to make such gifts.

Claiming Inheritance Tax Relief

When it comes to making a claim, your executors will need to provide evidence to HMRC of your income and outgoings. Therefore, taking steps now to document your intentions and the sources of the payments will make it easier for them to make the claim successfully. It can be very time consuming and challenging for executors to gather this information if you do not keep records of your income, your outgoings and details of the gifts you have made.

We suggest to our clients that they should review this on an annual basis and keep a record of outgoings for the year. Without this, executors will find that they need to trawl through your bank statements, review your income sources and put together a statement for HMRC which may not accurately reflect your intentions. The more details you can leave will increase the chances that HMRC will agree to the claim and enable you to pass more onto your beneficiaries.

For more information about gifts and inheritance tax exemption, contact Helen Gowin on 01260 282315 or email [email protected].

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