A little known Inheritance Tax trick can save your family a significant amount of money when it comes to administering your estate. This is how it works.
Surplus income – which is defined as income less expenditure to maintain your standard of living – can be regularly given away as a gift, after which it is no longer considered part of your estate and cannot be considered for Inheritance Tax, even after taking the ‘seven-year rule’ into account.
Under usual gifting rules, the donor must live at least seven years after giving a gift in order it for it to not qualify for Inheritance Tax. Surplus income gifts, on the other hand, will always be Inheritance Tax free.
Likewise, there is no limit to the amount of surplus income you can give away. The only rule is that it must be paid out of your annual income, and not capital. Also, you should make it clear that you have an intention to make surplus gifts over a period of time. For example, a letter should be drafted stating your intent to gift out of your income.
To find out more about gifting surplus income and other inheritance tax tips, please get in touch. It is advised to speak to a tax professional before making gifts out of surplus income.