Do you know, you are exempted from the inheritance tax (IHT) on the normal gifts out of your income, but there are certain conditions, levied by HMRC, to be fulfilled for your gifts or expenditures to be considered normal.
As stated in S21 IHTA 1984, your transfer of value would be considered exempt transfer if it applies the following conditions:
- It shows part of the transferor’s normal expenditure (IHTM14241)
- Gifts must be made out of regular income (IHTM14250)
- The transferor must retain normal income to maintain his/her normal standard of living.(IHTM14251)
What Is A Normal Income:
According to the definition given by HMRC, normal means the standard income a person receives. It should be from the regular patterns of income, not from something special.
If you ( as a donor) have made a firm commitment, through a letter, for future expenditures, you can avail the exemption. It does not need to be always fixed, but should be according to the established patterns of expenditures.
Examples of regular gifts include regular payments, Christmas gifts, birthdays gifts, or wedding/civil partnership anniversaries, educational costs, health costs, premiums on insurance policy etc.
Gifts Must Be Made Out Of Regular Income:
Income used here is the disposable income or surplus income after paying taxes and all other living expenses.
Your income should be the current income. If your income has turned into capital, you are not eligible for this relief. HMRC considers your income as capital if it is accumulated for two years. Therefore, you should provide evidence to prove that the gifts you made were out of your income.
Preferably, income should be calculated for the year in which the gifts were made. You should keep that in your mind that the income of previous years is not considered here.
Examples of income include salary, dividends, pensions, interest, business profit and rental income etc.
The Transferor Must Retain Normal Income To Maintain His/Her Normal Standard Of Living:
It varies from person to person to know what income amount is considered a normal income to maintain the standard of living.
The income used for daily expenses and surplus income vary, therefore, you should manage an income and expenditure analysis to be aware about your financial situation.
If your gifts are qualified for this relief, you don’t need to worry about the IHT. Moreover, there is no need for any seven-year survivorship period. Therefore this relief is going to be very beneficial for those who are having a lot of surplus income.
You should also keep track of your surplus income to find out the income that is going to be your capital soon. So to take the optimal benefits from this relief, exemptions, and to hive up the worth of your gifts, you should follow all the steps given.