Rising living costs and helping others; your IHT position may improve too

Many Britons are feeling the pressure of a rising cost of living, including an increase in the price of fuel, energy and supply chain issues, to name a few. The new health and social care levy is also effective from 6 April 2022. Given that some people have been impacted more significantly by this economic crisis than others, individuals that have fared relatively well may want to share any surplus income they have with family, but more widely too. Gift aid is one possible tax benefit for philanthropic efforts, however, a very generous inheritance tax (IHT) exemption may be worth exploring too.

Broadly, IHT is payable at up to 40 per cent on estates valued above the nil rate band threshold (currently £325,000). The recently published statistics on record-high IHT receipts (HMRC) indicate an upward trend, with that set to continue as the thresholds remain frozen until 2025/26. Lifetime gifts to individuals and certain organisations, can do good in supporting those struggling, whilst offering savings for estates with an IHT exposure.

An IHT exemption known as ‘normal expenditure out of income’ is worth considering where the donor has surplus income and wishes to make gifts to less well-off family members, friends and organisations that are not registered charities and gift aid is not available.

However, there are qualifying conditions – the key is that the gifts are made in the donor’s lifetime, sourced from income (not capital), and leave the transferor with sufficient funds to maintain their usual standard of living. There must also be a habitual pattern to the gifts. With the right conditions in place, the value of these gifts fall outside the donor’s estate immediately. There is no requirement to survive seven years to be fully exempt from IHT as for potentially exempt transfers (PETs). However, if surplus income is limited, gifts from capital may be PETs, but it’s important to be aware of any capital gains tax implications for non-cash transfers.

It is good practice for the donor to regularly evaluate their financial situation, including what they need for their own living expenses and the amount they are comfortable to share. It’s recommended that appropriate records are kept to evidence surplus income.

Gift aid relief, which is more widely known and used, provides income tax benefits for both the donor and the recipient charity. A combined gifting strategy which qualifies for gift aid and IHT exemptions has a wider financial impact. However, where the transferor wants to help a specific individual or non-registered charity, ‘normal expenditure out of income’ relief should not be overlooked as an incentive to make a difference.