Following on from the previous online article Inheritance Tax – Make use of lifetime exemptions,  further information is detailed below to explain the rules concerning gifts made from income.

Gifts that are made as part of the donor’s normal expenditure, if accepted, will be exempt from Inheritance Tax (IHT) and it is possible that significant tax savings can be obtained from this type of gift if it is supported with information to meet the following criteria:

• 1: The gift must form part of the donor’s normal expenditure;
• 2: It must be made from the donor’s income; and
• 3: It must leave the donor with sufficient income to maintain their normal lifestyle.

In order to meet the first criteria you must show that the gift is part of the donor’s settled pattern of expenditure (habitual gifts rather than special) and not irregular amounts or to various individuals. This can be established by keeping a record of expenditure over a period of time (see below) or the donor making a commitment and thereafter complying with it.

The type of gifts made from income can include:

• Monthly or other regular payments to someone;
• Regular gifts for Christmas, birthdays or wedding /civil partnership anniversaries; and
• Regular premiums on a life insurance policy for you or someone. 

The donor’s income in the second criteria must not include capital but will include income after tax such as earnings (employed/self employed), pensions, and property income etc.

The third criteria means that after making the gift, the donor must be left with enough income to maintain their normal standard of living. As everyone has different lifestyles then you will need to establish the normal living expenses in order to assess the surplus income that was available at the time gift was made. If you do not have sufficient income for normal expenditure and you reduce capital to meet these living costs at the time of the gift then the exemption will be lost.

In order to obtain this type of gift exemption, it is important that a record is kept of income and expenses and there is a specific  IHT form 403 which includes a schedule for this purpose. This form is usually for the executors etc. to complete but is a useful schedule if planning to reduce Inheritance Tax, as it will assist you in keeping sufficient records over a period of time to show these gifts were made out of income and obtain IHT exemption.

It would be advisable to seek professional advice in this area so please contact us  for any of your IHT planning needs.