Cash Clinic: Regular cash gifts can go a long way to easing burden of IHT

Q A RECENT Smart Money article on inheritance tax stated that if your gifts do not have an impact on your standard of living, you might be able to gift more on a regular basis and not be subject to the gifts being taken into account for IHT purposes. Would it be possible to expand on the "might be able" part of that, and could the regular basis be stopped at any time? Also, if I decided this may be suitable for me, how would I proceed?

PM Livingston

A The useful and under-used exemption in the field of IHT you are referring to is "normal expenditure out of income". If your income exceeds your expenditure and living expenses, then provided that you follow some simple rules, you can gift the spare income and it will not be taken into account when calculating the IHT due on your estate when you die.

Normal expenditure is spending which is typical of you, the actual person making the gift, not simply an average or reasonable person.

These gifts cannot be one-offs and there should be a regular pattern to these payments. You are not compelled to make gifts annually and there is no requirement for a fixed minimum period or fixed amount. The recipient doesn't need to be the same. However, you must show commitment regarding future expenditure.

Arrangements such as a parent funding a stakeholder pension on behalf of their child can therefore take advantage of the exemption. Gifts out of income can be used to pay premiums on life insurance policies held outside the estate, paying grandchildren's school fees, payments under a Deed of Covenant, cash gifts or contributions into a child or grandchild's pension fund.

Cash gifts allow your children to use up their individual savings account tax-free allowances. Contributions into your children's or grandchildren's pension funds have the added advantage that your child can claim tax relief on the payment, amounting to an additional 20 or 40 per cent contribution to the pension fund.

Any gifts must be made out of your income, which generally refers to current income. If the retained income has been invested in a form which yields income, it is generally deemed to have become capital.

After making a gift out of your excess income, you have to be left with enough income to maintain your usual standard of living.

If a gift resulted in you having to resort to capital for your general living expenses, the gift would not qualify for the exemption. The standard to be met is usually the standard of living you enjoyed at the time of the gift.

The normal expenditure out of income exemption is claimed retrospectively by your personal representatives so it is important to note that sufficient records must be maintained during your lifetime to enable a claim to be successful. HM Revenue and Customs requires you to keep annual records of your income and expenditure to prove this excess income.

• Glen Gilson, is a partner and head of private client and financial services at HBJ Gateley Wareing.

If you have a question you need answered, write to Jeff Salway, Personal Finance Editor, The Scotsman, 108 Holyrood Road, Edinburgh EH8 8AS or e-mail: [email protected].

This above is for general purposes only and is not tailored for individual use. It does not constitute legal, financial or investment advice on any particular matter and must not be treated as a substitute for specific advice. No action should be taken in reliance of the information given. The Scotsman Publications Ltd and HBJ Gateley Wareing accept no liability on the basis of this article.