Alexander Grace Chartered Financial Planner

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The gift of giving 

When it comes to our financial legacy we all want to be able to pass on as much as possible to our loved ones when we’re gone. Regular gifting could be a great way of protecting your family’s financial future and reducing the impact of inheritance tax.  

You can use the regular gift exemption to give away any amount of money you like, free of inheritance tax, provided that it comes out of your regular income without affecting your standard of living and is gifted regularly, which means at least annually.  

Examples of regular gifts could include caring for an elderly relative, insurance policy premiums or private healthcare arrangements. Or it could be that you want to pay for school or university fees, or to make regular savings into a trust, Junior ISA or pension scheme.  

It’s worth bearing in mind that when you die HM Revenue & Customs will require proof that the payments came out of your income, and they didn’t affect your standard of living.  

This means that your executor will need to itemise your income and expenditure for all the years the regular gift exemption was being claimed.  

Top tips  

  • Write a letter to those you’re making gifts to, setting out your intention of gifting to them on a regular basis using your surplus income. This could be useful evidence in establishing your intention should any queries be raised after your death. 
  • Keep a record of your income and expenditure for the two tax years prior to your first gift. HM Revenue & Customs will usually accept that unused surplus income will only become capital after two years and you may be able to make use of unused surplus income from a previous tax year. 
  • Keep full records of your income and expenditure, so that your executors are easily able to identify your surplus income. To help you keep track of these payments, HM Revenue & Customs have introduced a budget analysis sheet to the Inheritance Tax account form IHT403. 
  • Include income from ISAs as part of your income. 

Helping family and friends during your lifetime means that you can enjoy seeing your chosen recipients enjoy and benefit from their gifts. 

If you’re fortunate enough to have surplus income and you’re able to regularly financially support those close to you, talk to your adviser about how regular gifting could work for you and your family.  

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