IHT exemption – Gifts out of income
Background
A very generous claim can be made which exempts certain gifts from Inheritance Tax (IHT), representing a potential IHT saving of 40%. Such gifts are known as ‘normal expenditure out of income’ or ‘gifts out of income’.
There are a number of conditions that must be satisfied in order to make a successful claim and if you want to deduct normal out of income expenditure from the deceased’s estate, you must provide details of the gifts to H M Revenue & Customs (HMRC). Page 6 of the form IHT403 Gifts and other transfers of value has been created specially to set out the details that HMRC require.
Making a successful claim
HMRC’s recently issued Trusts and Estates newsletter has however highlighted that increasingly claims are being rejected by HMRC as they have been completed incorrectly. Typically the reasons given are that page 6 of IHT403 is incomplete and there is no separate schedule showing income an expenditure. If you don’t complete page 6 or provide a supporting schedule it will take HMRC longer to consider whether normal out of income exemption applies. HMRC may also need to ask further questions about the deceased’s income or expenditure if you don’t set these details out clearly, which can cause problems as the deceased is no longer alive.
Best practice indicates that you should take the opportunity to consider making such a claim during the deceased’s lifetime. We recommend that page 6 of IHT403 ought to be competed annually in order to give fullest information to HMRC and secure a successful claim, while the deceased is still alive. This exercise could be carried out towards the end of the tax year as part of any pre-year end tax planning. This can also give you the opportunity to maximise the amount of the exemption that can be claimed if you have a clear picture of your income and expenditure on a year by year basis.
If you have any questions about the conditions to qualify for the exemption and the successful completion of the form IHT403 or any other IHT planning opportunities please contact our Tax Director, Jenny Marks.
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