Clear House Accountants
Contact
Clear House Accountants
  • About Us
  • Services
    • Accounting Services
    • Business Advisory
    • Business Support
    • IT Services
    • Marketing Consulting
    • Payroll
    • Service Charge
    • Tax Services
    • VAT Services
  • Locations
    • Accountants in London
    • Accountants in Stanmore
    • Accountants in Harrow
  • Resources
    • Growth Portal
  • Partners
  • Contact
  • Blog
  • Switch Accountants
inheritance tax
06 Jul

How to avoid inheritance tax legally and save income


By:   Jibran Qureshi General Blog Comments:   No Comments


You can avoid inheritance tax legally and save on your estate by giving family or friends your excess income. But if your earnings take a dive one year, how can you ensure maximum tax efficiency for this arrangement?

Knock-on effect

The recession has caused many people’s income, whether in the form of earnings from a job or investments, to drop over the last few years. That’s bad news in itself but it can have an unexpected knock-on tax effect. If you were relying on the so-called “gifts out of income” inheritance tax (IHT) exemption, your lower income could create another problem for you.

How much is exempt?

S.21 of the Inheritance Taxes Act 1984 says that if you make a gift out of your income, no matter how great, it will cease to be part of your estate for IHT purposes from the moment you make it. That’s good news, as usually you’ll have to wait for seven years before a gift becomes IHT exempt. That makes “s.21 relief” a really useful tax planning tool for keeping the level of your estate down. But it’s not all plain sailing.

Conditions recap

As you would expect, HMRC throws in a few conditions. Apart from needing to be paid out of your net income:

  • First condition. The gift should be part of your “normal expenditure”. “Normal” in this case means usual and expected.

Trap. If you don’t make the gifts on a regular basis, say, once a year, the exemption won’t apply.

  • Second condition. After making the gifts you must have enough income left to maintain your usual standard of living. But there are exceptions to this condition. If your available income is less because of unexpected expenses, e.g. short-term nursing care costs, these can be ignored.

The best laid plans

Say that several years back as part of your IHT plan you started to make regular gifts to your grandchildren. But your income has dropped to a level where you’re having to eat into your capital to make the gifts. This will mean that they could lose their exempt status and potentially be liable to 40% IHT. What action should you take?

Not in isolation

Firstly, don’t panic into stopping the gifts, as you may be OK if your income recovers to a level where it will again cover them. The law says that you can “take one year with another” when considering whether you have enough income. For example, even if your income wasn’t sufficient in 2013/14, as long as your 2014/15 income will be enough to cover the shortfall, and any gifts out of income for 2014/15, the exemption can still apply for both years.

Tip. Record keeping is vital to prove that s.21 relief applies. You’ll need to be thorough in listing all your income, expenses and gifts each year.

Advice from the horse’s mouth

HMRC’s guidance at IHTM14250 says that if a gift is paid out of a current account, it will accept it as a gift out of income, no questions asked.

Tip. Pass all cash gifts via your current account and keep a copy of the relevant bank statement with your spreadsheet.

Leave a Comment Cancel reply

Categories

  • Blog
  • Compliance Blog
  • General Blog
  • Growth Blog
  • Infographics
  • Small Business Advice
  • Startup Blog
  • Tax Blog
  • Updates

RSS RSS Feed

  • Self Assessment Tax Return Deadline: Avoid the Last-Minute Panic January 15, 2021
  • VAT on Food and Its Future December 25, 2020
  • How to Create an Effective Recruitment Budget? December 24, 2020
  • A Complete Understanding of VAT for your Business December 22, 2020
  • Implications of Tax on a Virtual Christmas Party December 18, 2020

Clear House are Accountants in London, that provide services to startups, sole traders and SMEs

Find More Information

About Us

  • Home
  • About Us
  • Growth Portal
  • Blog
  • Contact
  • Referral Program
  • Privacy Policy

Our Offices

London Office
Harrow Office
Stanmore Office

+44 (0)207 117 2639
info@chacc.co.uk

Copyright 2010-2021 © A Firm Registered in England. Clear House Accountants. All rights reserved.

This website uses cookies to improve your experience. We'll assume you're ok with this, but you can opt-out if you wish. Cookie settings
AcceptReject
Privacy & Cookies Policy

Privacy Overview

This website uses cookies to improve your experience while you navigate through the website. Out of these cookies, the cookies that are categorized as necessary are stored on your browser as they are as essential for the working of basic functionalities of the website. We also use third-party cookies that help us analyze and understand how you use this website. These cookies will be stored in your browser only with your consent. You also have the option to opt-out of these cookies. But opting out of some of these cookies may have an effect on your browsing experience.

Necessary
Always Enabled

Necessary cookies are absolutely essential for the website to function properly. This category only includes cookies that ensures basic functionalities and security features of the website. These cookies do not store any personal information.

Non-necessary

Any cookies that may not be particularly necessary for the website to function and is used specifically to collect user personal data via analytics, ads, other embedded contents are termed as non-necessary cookies. It is mandatory to procure user consent prior to running these cookies on your website.