Gifts out of surplus income

Produced by Tolley in association with

Trusts and Inheritance Tax

Guidance

A valuable exemption from inheritance tax (IHT) applies to gifts out of surplus income. This exemption applies only to lifetime gifts and is therefore a key part of lifetime planning. The exemption applies to both outright gifts and gifts into trust.

Gifts which meet the qualifying conditions (see below) are immediately exempt from IHT so it is not necessary to survive seven years to obtain the exemption. Exempt gifts are not aggregated with later gifts and do not eat into the IHT nil rate band. Clients should make use of basic exemptions such as this before embarking on more complex lifetime planning.

There is no set limit on the amount that can be given away, provided the gift does not exceed the donor’s surplus income.

When does the exemption apply?

The qualifying conditions in order for this exemption to apply are as follows.

The gift must be made from income

Gifts made from capital will not be covered by the exemption and it will ultimately be necessary to demonstrate

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Emma Haley

Associate at Boodle Hatfield LLP

Emma Haley is a senior associate solicitor at leading private client firm, Boodle Hatfield LLP, renowned for providing first-class and practical legal advice to wealthy clients around the world. Emma has many years experience in dealing with all aspects of wills, probate, capital taxation and succession planning as well as UK and offshore trusts. Emma currently heads up a technical know-how team and is a regular writer and lecturer on estate planning and inheritance tax and also a member of the Society of Trust and Estate Practitioners.

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