When a gift is made, the person giving (the donor) has to survive 7 years from the date of the gift to prevent some, or all, of the gift being brought back into the estate for Inheritance Tax (IHT) purposes. There is, however, an allowance for gifts made as part of your normal expenditure from your income.
Any regular gifts you make out of your after-tax income, not including your capital, are exempt from Inheritance Tax. These gifts will only qualify if you have enough income left after making them to maintain your normal lifestyle.
- monthly or other regular payments to someone;
- regular gifts for Christmas and birthdays, or wedding/civil partnership anniversaries; and/or
- regular premiums on a life insurance policy – for you or someone else
You can also make exempt maintenance payments to:
- your husband, wife or civil partner;
- your ex-spouse or former civil partner;
- relatives who are dependent on you because of old age or infirmity; and/or
- your children, including adopted children and step-children, who are under 18 or in full-time education
If you make gifts out of income as part of your normal expenditure, you should keep a record of your after-tax income. This will show that the gifts are regular and that you have enough income to cover them and your usual day-to-day expenditure without having to draw on your capital. If the gifts are in cash it is important that regularity is established; an easier way of doing this is to pay a bill or a series of bills for the person to whom the gift is to be made (the donee).
Because an intention to make regular gifts out of normal income can be established by written evidence, and supported by other records, such as receipts and bank statements, then even if a donor does not survive for 7 years the executors of the estate will be able to claim for the payments to be removed from the estate, thus generating substantial IHT savings.