Did you know, that in the UK, gifting out of surplus income is a powerful strategy to mitigate Inheritance Tax (IHT) without the 7-year rule?
The commonly held belief is that gifting is only beneficial if done seven years prior to death. While true in some instances, it overlooks an essential element – gifting from surplus income. This is treated differently from gifting out of capital.
Gifts made from regular, surplus income are immediately tax-free and won’t incur a bill later on.
However, the key lies in understanding what constitutes ‘surplus’ To qualify for the exemption, the gift must fulfil three criteria.
First, it must come from income, rather than capital. Noting that once you have held onto income for a couple of years, the taxman starts to treat it as capital,
Second, it doesn’t matter how often you make a gift – whether it’s monthly or yearly, – so long as it follows a regular pattern.
And third, the gifts should not affect your everyday standard of living. If you’re planning to gift from surplus income you should keep a record.
Also, note that the executors of an estate will have to complete a form called IHT 403 to show the gifts qualify for this exemption. The form details income, expenditure and the gifts made.
Filling out these forms in advance can be extremely helpful. At the very least a note of the gifts should be written down and kept somewhere safe, preferably with your will.
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