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Gift out of Surplus Income to beat Inheritance Tax

December, 20, 2024-03:22

Gift out of Surplus Income to beat Inheritance Tax

Gifting: If gifts are deemed to have been made from capital, then they will be included in inheritance tax calculations

Harvey Dorset, of This is Money, replies: The exemption you are looking to use, officially known as 'normal expenditure out of income', is a useful way of passing on wealth to your children without incurring inheritance tax on the money you give to them.

Gifting rules stipulate that you can only pass on £3,000 per year in total without being liable for inheritance tax if you die within seven years.

You can also make multiple gifts of £250 or less to recipients who weren't among those benefiting from the £3,000.

In each tax year, you are also allowed to give a child £5,000 as a wedding gift.

In order for your gifts to qualify as gifting out of income, the money must form part of your normal expenditure, be made out of your income rather than your capital and leave you with enough income to maintain your normal standard of living.

Forming part of your normal expenditure is usually considered to mean the transfer is a regular gift that forms a 'pattern of giving'.

As well as the above, the following can be given away in each tax year:

• Wedding or civil ceremony gifts (up to £5,000 for a child, £2,500 for a grandchild or great-grandchild, or £1,000 for anyone else)

• Money to help with another person's living costs – usually to children under 18 or people who are dependent on you because of old age or infirmity

• Gifts to charity or political parties

• Gifts out of surplus income.