Last year a little known inheritance tax loophole allowed 430 families to save £67m from death duties by making unlimited gifts completely free of inheritance tax (IHT).
The valuable exemption is called “gifts out of normal expenditure” and can be found in Section 21 of the Inheritance Tax Act 1984. Gifts out or normal expenditure allows taxpayers to give away sums of any size as long as they come under their “normal expenditure.”
The gifts out of normal expenditure rule is in addition to the £3000 annual gift exemption which can give you an extra IHT saving.
Despite the availability of the IHT relief HM Revenue & Customs data indicates that in the last five years only 2,490 taxpayers claimed a reduction in their IHT bills using the allowance.
This suggests that thousands more families may have neglected to claim and have potentially missed out on significant savings relating to inheritance tax.
As property prices continue to rise across the UK more families are becoming ensnared by inheritance tax liabilities.
Official forecasts predict that by 2027-28, around 47,000 families per year will be paying IHT due primarily to frozen tax thresholds.
If IHT is effecting you now or might in the future you should find out if you are eligible for the annual gift exemption relief and how to claim it.
Don’t let a lack of knowledge or understanding mean you miss out on the IHT relief you are entitled to.
Am I eligible to claim Gifts out of Normal Expenditure?
To be eligible for exemption from IHT the donations will generally need to meet three conditions.
- The gifts must align with the donor’s typical expenses and be made consistently.
- These payments should be covered by the donor’s earnings, such as pensions, dividends, rent, or wages, without affecting their standard of living.
- If the donor had to rely on their savings to meet their needs after donating HMRC would probably reject the request.
If all three requirements are met the gifts should be free of IHT.
It’s important to note that this exemption is separate from the annual gift tax allowance and the lifetime gift tax exemption level.
A lack of awareness about the existence or workings of this exemption is likely responsible for its underutilization by many families. Additionally some people may assume they are ineligible due to their income level or other factors which could limit access to these benefits.
How do I claim Gifts out of Normal Expenditure tax relief?
To take advantage of this potentially valuable relief families must fill in the IHT403 form. The IHT403 is how HMRC expects you to report gifts that qualify for exemptions or reliefs from inheritance tax.
Importance of good record keeping for IHT:
Maintaining accurate records is essential when utilizing this exemption. Families should keep track of all relevant financial transactions and ensure that these gifts are indeed part of their normal expenditure pattern.
By doing so they can provide sufficient evidence to HM Revenue & Customs (HMRC) if required in the future.
What is the IHT Annual Gift Allowance?
One effective way to minimize inheritance tax liabilities is through making gifts during your lifetime.
The annual exemption of £3,000 allows you to give away this amount each tax year without incurring any IHT charges.
The annual gift allowance is separate to the gifts out of normal expenditure relief and both can be used at the same time.
These gifts can be made to anyone and do not count towards the total value of your estate when calculating IHT.
Unused portions of the allowance can also be carried forward one year but cannot exceed £6,000 in total.
Rising Property Prices and Increased IHT Payments
The effect of the substantial increase in property values on mainly middle-class homeowners, who may not have previously viewed themselves as wealthy enough to be concerned about inheritance tax is now being keenly felt.
With the IHT nil rate band threshold remaining at £325,000 since April 2009, an increasing number of estates are now subject to IHT as their value exceeds this limit.
Calls for Reforming or Abolishing Inheritance Tax:
This situation has led to growing calls for reforming or even abolishing inheritance tax altogether. Critics argue that it is an unfair “double taxation” system, as assets within an estate have often already been taxed during the deceased’s lifetime through income and capital gains taxes.
Some suggest replacing IHT with a lifetime receipts based system which would provide greater fairness and simplicity while still generating revenue for public services.
Strategies for minimizing Inheritance Tax liabilities
To protect your assets from excessive taxation upon death, it is crucial to understand how various exemptions work and which ones apply specifically towards minimizing overall liability within your estate.
By utilizing these strategies effectively – such as gifting money, setting up trusts, or even making charitable donations – individuals can ensure maximum wealth preservation legitimately.
Some common IHT strategies include:
Setting Up Trusts for Beneficiaries
Trusts are another valuable tool for reducing inheritance tax liabilities. By placing assets into a trust, you can control how they’re distributed among beneficiaries while potentially avoiding IHT altogether depending on the type of trust established.
Charitable Donations and Tax Relief
Making charitable donations during your lifetime or leaving a portion of your estate to charity can also help reduce inheritance tax liabilities. Not only do these contributions provide much-needed support for worthy causes, but they may qualify for tax relief as well.
Inheritance Tax Advice
To ensure that you are not overpaying on your inheritance taxes and taking advantage of all available reliefs (like gifts out of normal expenditure) and strategies you should consider tax planning advice from an IHT advisor.
An IHT advisor can keep you up to date with IHT legislation changes and tailor a strategy built around your own needs now and in the future.
