IHT planning: gifts from surplus income

Recap

Among the most valuable inheritance tax (IHT) planning stategies is the concept of making gifts from surplus income. Where HMRC accepts that a gift is made from surplus income, it is immediately exempt from iIHT - meaning there is no seven-year clock, and it doesn’t use up any of the nil-rate band. Contrast this with the rather measly £3,000 annual exemption, and it's easy to see why it is potentially very valuable.

Surplus

To be accepted as being made from surplus income, the donor needs to be able to demonstrate that they were able to afford the gift without diminishing their capital or standard of living. However, there is a further condition that must be met.

Regular

Gifts must be an intended part of normal expenditure; normal for the donor, not the average person. What HMRC wants to see is a regular pattern of such gifts and evidence of it. This is relatively straightforward if such gifts have been made year on year, but what if the donor dies after making only a couple of gifts?

Letter of intent

It's prudent for the donor to write a letter signalling the intention for the gift to form part of a regular pattern of giving when they make the first payment. That way, if they were to die after only making a single gift their executors can point to the letter as proof of the intention. This should prevent HMRC from being able to challenge the gift and charge IHT on it.

Our template letter can be used for this purpose. The letter should be completed where required and send it to the intended executors - not to HMRC.