What is the Normal Expenditure out of Income Exemption?
In our experience many clients are unaware of the normal expenditure out of income exemption which is a very useful exemption allowing an individual to give away surplus income each tax year without any Inheritance Tax implications at all.
If for example an individual’s net income after tax amounts to approximately £50,000 per annum and their outgoings amount to say £25,000 per annum then they have surplus income of up to £25,000 which they could give away to children, grandchildren or other beneficiaries with no tax implications. In other words the donor of the gift does not have to survive for a period of seven years for the gifts to escape tax.
There is no need to make a return of these gifts to HM Revenue & Customs (HMRC) but it is essential for the donor to keep an accurate record of the gifts made together with their income and outgoings. The donor’s annual tax return would amount to a record of their income but the donor would also need to keep a record of their outgoings.
It is also wise for the donor to write a simple letter to their intended donee(s) indicating that it is their intention to review their finances preferably at the end of each tax year with a view to passing across surplus income to the donee(s) to take advantage of the exemption.
Provided clients follow these steps and accurate records are maintained we would not anticipate there being any difficulty over applying the relief.
The table on the back of this factsheet is the table that needs to be completed for Inheritance tax purposes where an individual has been making gifts relying on this exemption during the seven years preceding their death. We recommend that you use this table for your record keeping.
If you would like to discuss the operation of this relief in any more detail, please contact a member of our Private Client Team.
These notes are not exhaustive and are meant as a basis for discussion with your legal adviser. If clients wish to discuss any of the above, please contact our Private Client Team 020 8940 4051 who will be pleased to help you
IMPORTANT: this information is intended to be a general statement of the law. No action should be taken in reliance on it without seeking specific legal advice.
