Advice

Gifts Out of Surplus Income

Chris Stedman
Senior Partner
August 30, 2021
    
7 min read

An interesting query appeared in a recent edition of a professional magazine concerning habitual gifts out of surplus income. An accountant has a wealthy client who wants to make a lifetime gift of £50,000 and will probably make additional gifts of similar amounts in subsequent years. The question is…. when will such gifts be regarded as “habitual” and therefore qualify for total exemption?

What are the rules?

Lifetime transfers are exempt from inheritance tax to the extent that:

  1. They are part of the normal, habitual or typical expenditure of the transferor;
  2. Taking one year with another, they are made out of income (i.e. not out of capital); and
  3. The transferor is left with sufficient net income to maintain his or her usual standard of living.


This is an extremely useful exemption. Unlike gifts deriving from capital there is no annual exemption of £3000 to worry about and no requirement for the transferor to outlive the gift by 7 complete years.

When do gifts become habitual?

HMRC will usually consider expenditure to have become normal or habitual or regular when they have been made three times, with the intention of continuing to make further similar payments.

However it is possible to establish the gifts have become part of one’s normal expenditure even if death intervenes after the first gift. What is needed is a clear intention on the part of the transferor that gifts will continue on a regular basis. These do not have to be for the same amount or to the same person, incidentally.

A contractual commitment to make regular payments will usually be accepted as evidence of an intention to make the expenditure part of the transferor’s normal pattern of expenditure. In the absence of such a commitment some other documentary evidence of the transferor’s intentions is advisable.

Record of income & expenditure

It is vital that a clear record of both income and expenditure is maintained on a year by year basis and that your Executors know about it and know where to locate it. When HMRC becomes aware that there have been lifetime gifts he will ask the Executors to complete a complex form requiring all relevant information. This can be a very difficult job for Executors and the transferor can make it a lot simpler by maintaining a year by year record.

Income consists of business profits, salary, pensions, rents, interest (including PEPs and ISAs), annuities, dividends and other investment income.

Deduct income tax payable to arrive at net income.

Expenditure will include such items as mortgage payments, insurance, household bills, council tax, travelling costs, entertainment, holidays, nursing home expenses and any other outgoings.

Net income less expenditure will establish your residual or surplus income.

Smaller gifts

Not everyone has surplus income of £50,000 to give away each year but the same principles apply to smaller gifts. Remember that income not spent or gifted will be added to capital and may well be charged to inheritance tax @ 40% one day.

And finally…

You can be quite sure that any significant gifts out of income will be thoroughly scrutinised by HMRC. The examining officer will have to be satisfied that all conditions have been met but a well-kept record will go a long way in support of a claim. C&H Stedman will be pleased to provide you with a template on request.

C&H Stedman
For more info, give us a call on 01442 202650

Subscribe to Steddi Updates

Get industry insights that you won't delete, straight to your inbox.
We use contact information you provide to us to contact you about our relevant content, products, and services. You may unsubscribe from these communications at any time. For information, check out our Privacy Policy.

More news

Latest News

Making Tax Digital - Postponed

The government has just announced some important postponements in its efforts to fully digitalise and streamline the UK tax system. A parliamentary statement was presented to the House of Commons by Lucy Frazer, the new Financial Secretary to the Treasury, on 23 September 2021. So what is on hold and for how long?

Read Article

Capital Gains Tax - A Garage Project

George & Mary bought their family home in 1996. It costs them £265,000. The property and the separate garage stand in a plot which is just within the “permitted area”. This is normally taken as 0.5 hectares which in broad terms corresponds to 1.235 acres. George & Mary have looked after the property and as it stands today it would probably fetch £1.4m. But George & Mary have other ideas...

Read Article

Coronavirus Job Retention Scheme - Fraudulent and Erroneous Claims

Now that furlough has drawn to a close, businesses should brace for a significant flood of letters from HMRC as the government looks to recoup a suspected £7bn of fraudulent or erroneous coronavirus job retention scheme (CJRS) claims.

Read Article