{"id":5946,"date":"2024-09-09T14:44:54","date_gmt":"2024-09-09T14:44:54","guid":{"rendered":"https:\/\/www.bainesjewitt.co.uk\/blog\/?p=5946"},"modified":"2024-09-09T14:44:56","modified_gmt":"2024-09-09T14:44:56","slug":"gifts-out-of-surplus-income-a-smart-way-to-reduce-inheritance-tax","status":"publish","type":"post","link":"https:\/\/www.bainesjewitt.co.uk\/blog\/gifts-out-of-surplus-income-a-smart-way-to-reduce-inheritance-tax\/","title":{"rendered":"Gifts out of surplus income &#8211; A smart way to reduce Inheritance Tax"},"content":{"rendered":"<p>Making financial gifts during your lifetime is a thoughtful way to provide for your loved ones while also reducing your estate\u2019s exposure to Inheritance Tax (IHT).<\/p>\n<p><!--more--><\/p>\n<p>One often overlooked but effective approach is using surplus income to make these gifts.<\/p>\n<p>Over time, this can help lower the value of your estate, easing the potential IHT burden on your beneficiaries.<\/p>\n<p>With IHT charged at 40 per cent on estates above \u00a3325,000, taking advantage of surplus income gifting allows you to offer financial support while making your estate more tax efficient.<\/p>\n<p><strong>What is surplus income?<\/strong><\/p>\n<p>Surplus income refers to the money left over after covering all your living expenses, such as bills, food, and personal spending.<\/p>\n<p>This isn\u2019t just your salary or pension, it also includes interest from savings, dividends from investments, and rental income from properties, amongst other sources.<\/p>\n<p>If you\u2019re fortunate enough to have regular income left over after meeting all your day-to-day needs, you might be able to use this surplus to make gifts that could be exempt from IHT.<\/p>\n<p><strong>How do gifts out of surplus income work?<\/strong><\/p>\n<p>Gifts out of surplus income are a special exemption from IHT, but there are three important rules to follow:<\/p>\n<ul>\n<li><strong>The gifts must come from your income<\/strong> &#8211; The gifts should be made from your regular income, not from your savings or capital.<\/li>\n<\/ul>\n<p>This means they must come from ongoing income sources, such as wages, dividends, or rental payments (after tax).<\/p>\n<ul>\n<li><strong>Payments should be regular<\/strong> &#8211; These gifts need to become part of your &#8220;normal expenditure&#8221;, meaning they should be made on a regular basis.<\/li>\n<\/ul>\n<p>This could involve setting up monthly or annual payments to the recipient. One-off gifts from surplus income generally won\u2019t qualify for this exemption.<\/p>\n<ul>\n<li><strong>No impact on your standard of living<\/strong> &#8211; Making these gifts shouldn\u2019t negatively affect your own lifestyle.<\/li>\n<\/ul>\n<p>In other words, you must still be able to comfortably cover your own costs after giving away the surplus income.<\/p>\n<p>If you make a gift from your income but then need to rely on your capital to cover your usual living expenses, the exemption will no longer apply.<\/p>\n<p><strong>Your next steps<\/strong><\/p>\n<p>If you believe you have surplus income and want to start gifting, here\u2019s a simple plan to get you started:<\/p>\n<ol>\n<li><strong>Assess your income<\/strong><\/li>\n<\/ol>\n<p>Calculate your total income from all sources, including wages, pensions, dividends, rental payments, and interest.<\/p>\n<p>&nbsp;<\/p>\n<p>However, you should be aware that certain withdrawals, like the five per cent annual allowance from an investment bond, don\u2019t qualify as income for this purpose.<\/p>\n<p>&nbsp;<\/p>\n<p>Failing to correctly calculate your income could lead to unexpected tax bills for your loved ones.<\/p>\n<p>&nbsp;<\/p>\n<ol start=\"2\">\n<li><strong>Evaluate your living costs<\/strong><\/li>\n<\/ol>\n<p>Make sure you have a clear understanding of your monthly and annual expenses and only consider gifting income that is genuinely surplus.<\/p>\n<p>&nbsp;<\/p>\n<p>If you are unsure whether you have enough surplus income to make these gift payments, then consider consulting an accountant or financial advisor for their expertise.<\/p>\n<p><strong>\u00a0<\/strong><\/p>\n<ol start=\"3\">\n<li><strong>Set up a regular gifting plan<\/strong><\/li>\n<\/ol>\n<p>Once you\u2019re confident you have surplus income, you should establish regular payments to your chosen recipients.<\/p>\n<p>&nbsp;<\/p>\n<p>It\u2019s often easier to set up a standing order to help with consistency, so you don\u2019t accidentally miss a payment.<\/p>\n<p>&nbsp;<\/p>\n<ol start=\"4\">\n<li><strong>Keep clear records<\/strong><\/li>\n<\/ol>\n<p>Be sure to maintain detailed records of your income, expenditures, and the gifts you\u2019ve made.<\/p>\n<p>&nbsp;<\/p>\n<p>HMRC may ask your beneficiaries to prove that these gifts were made from surplus income and did not affect your lifestyle.<\/p>\n<p>&nbsp;<\/p>\n<p>A helpful tip is to write a letter of intent to the recipient when you start making these payments.<\/p>\n<p>&nbsp;<\/p>\n<p>This letter can state that the gifts are being made out of surplus income, serving as valuable evidence for HMRC after your death.<\/p>\n<p>&nbsp;<\/p>\n<ol start=\"5\">\n<li><strong>Seek professional advice<\/strong><\/li>\n<\/ol>\n<p>It\u2019s always a smart idea to consult with an accountant or financial advisor when considering gifts out of surplus income.<\/p>\n<p>&nbsp;<\/p>\n<p>They can help ensure that your gifting strategy is both tax-efficient and compliant with HMRC guidelines, reducing the risk of disputes following your death.<\/p>\n<p><strong>If you would like guidance on gifting out of your surplus income, our accountants are here to support you, so please get in touch.<\/strong><\/p>\n<p>&nbsp;<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Making financial gifts during your lifetime is a thoughtful way to provide for your loved ones while also reducing your estate\u2019s exposure to Inheritance Tax (IHT).<\/p>\n","protected":false},"author":2,"featured_media":5949,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[24,125],"tags":[],"_links":{"self":[{"href":"https:\/\/www.bainesjewitt.co.uk\/blog\/wp-json\/wp\/v2\/posts\/5946"}],"collection":[{"href":"https:\/\/www.bainesjewitt.co.uk\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.bainesjewitt.co.uk\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.bainesjewitt.co.uk\/blog\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.bainesjewitt.co.uk\/blog\/wp-json\/wp\/v2\/comments?post=5946"}],"version-history":[{"count":1,"href":"https:\/\/www.bainesjewitt.co.uk\/blog\/wp-json\/wp\/v2\/posts\/5946\/revisions"}],"predecessor-version":[{"id":5947,"href":"https:\/\/www.bainesjewitt.co.uk\/blog\/wp-json\/wp\/v2\/posts\/5946\/revisions\/5947"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.bainesjewitt.co.uk\/blog\/wp-json\/wp\/v2\/media\/5949"}],"wp:attachment":[{"href":"https:\/\/www.bainesjewitt.co.uk\/blog\/wp-json\/wp\/v2\/media?parent=5946"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.bainesjewitt.co.uk\/blog\/wp-json\/wp\/v2\/categories?post=5946"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.bainesjewitt.co.uk\/blog\/wp-json\/wp\/v2\/tags?post=5946"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}