Unspent income during lockdown could reduce future tax bills

Charlotte Mandy

Article written by Charlotte Mandy, Solicitor, Private Client department

While online shopping seems to have boomed during lockdown, many people have spent less than usual while forced to stay home, and those with spare money have an opportunity to make the most of inheritance tax reliefs on gifts to family and friends, if they act swiftly.

Giving away assets during your lifetime can reduce the size of your estate for inheritance tax (IHT) purposes. Inheritance tax (IHT) is primarily a tax paid on assets upon someone’s death and the charge is 40% for assets over the available tax free allowance (Nil Rate Band).

Each person can pass on a maximum of £325,000 in assets tax free, including shares and property. There is an extra £175,000 allowance if you own a property which is your main home and you pass it to a direct descendant. If you are married or in a civil partnership, anything you leave to your spouse or civil partner is exempt from IHT and on the death of the surviving spouse or civil partner their estate will be eligible for two allowances.

There are various exemptions that can apply to lifetime gifts, which would otherwise be chargeable to IHT. For example, small gifts to any one person of up to £250 in total in any one tax year are exempt. There is also an annual exemption for lifetime gifts of up to a total of £3,000 in a tax year.

In addition gifts to charities and political parties are exempt whether these gifts are made during your lifetime or on death. If you leave at least 10% of your estate to charity you may be eligible for a reduced rate of IHT at 36%.

Another useful exemption is making gifts from surplus income in excess of your expenditure.  Surplus income is any income you have left over after all of your usual outgoings each month. Any gifts you make from that surplus income may be wholly exempt from inheritance tax regardless of how long you survive after making the gift. For a gift to apply you would need to show that the gift was made as part of a regular pattern of giving and demonstrate that it came from surplus, current income. If you have surplus income that has built up during the restrictions of the past year, now is a very good time to review this whist the funds are still considered to be income.

The exemption for gifts from surplus income is claimed after death by the person administering your estate (Personal Representatives). The Personal Representative must be able to demonstrate that the criteria for the exemption have been met. This is why it is important to keep a record of income and expenditure and show an intention to set up a regular pattern of giving. We can advise on the best way to record gifts so that your Personal Representatives can easily demonstrate your intentions to HM Revenue and Customs when they are administering your estate.

If you think that you may be able to utilise any of these options for making gifts, we would strongly recommend setting up a meeting to discuss the best way to structure and record the gifts to ensure that all the available IHT reliefs can be maximised on your death. We would also suggest that you review your options for making gifts during any regular review of your finances and ensure that you review your Will if you have made any significant gifts.

To discuss this article or for further information on IHT and estate planning, please feel free to email me or contact the Private Client department on 020 8858 6971.