Gifts out of income and their benefits to beneficiaries
Giving away surplus income as a gift to family members is often touted as an excellent way of planning for the future and as a way of reducing liabilities on a person's estate. But how do the rules regarding gifts work in practice?
Gifts provided from surplus income – i.e. income less usual expenditure to maintain your standard of living – are not considered as remaining part of a person's estate, regardless of how long they survive for following the gift and should, therefore, be free of inheritance tax (IHT).
Under the current rules, there is no limit on the amount that you can give away as a gift out of income, but it is recommended that a letter of intent is prepared when making such regular gifts.
This can be provided to HM Revenue & Customs (HMRC) in the event of a short period of giving due to a change of personal circumstance. In addition, there is no requirement for the donor to survive seven years for the gifts to be free of IHT, unlike lifetime gifts.
Where gifts are to be made to a minor, and regular payments may not be appropriate, then a discretionary trust into which the payments are made might be more suitable.
Normally, there is IHT on the transfer of income into the trust if the nil rate band is exceeded, although the accumulated income in trust will not use up the Nil Rate Band. However, this does not apply where regular gifts out of income are made.
The 10 year charge can be avoided by distributing the assets in the trust prior to the 10 year anniversary of the trust. Alternatively, a number of different trusts could be set up with the amount invested into each trust restricted so that the nil rate band is not exceeded at the 10 year anniversary of the trust. However, the growth in the value of the assets in the trust would need to also be taken into account.
Link: Inheritance Tax: Gifts
For more information, contact Baines Jewitt on 01642 632032