Inheritance Tax (IHT) has been in the news a lot recently, with calls for it to be replaced and a consultation launched into people’s experiences of it. But, until the day comes when a decision is made on its future, if your estate is worth over £325,000, the beneficiaries of your legacy will have to pay it.
There is, however, a little known trick which could save those you leave your wealth to a significant sum of money.
It regards surplus income, which is the income minus expenditure needed to maintain a standard of living. This can be given away on a regular basis as a gift, whereupon it ceases to be classed as part of your estate and therefore not eligible for Inheritance Tax.
Surplus income gifts do not fall under the ‘seven year rule’ either. This rule means the person donating the gift must live for seven years afterwards for it not to be subject to IHT. A surplus income gift will remain free of Inheritance Tax regardless of the length of time a donor lives.
As long as the gift comes from your annual income and not capital, and you have made clear your intention to bestow these over a period of time (in a letter, for example), there is no limit to the amount of surplus income you can give away.
It is advisable you speak to a tax professional before making any decision regarding the gifting of surplus income.