‘Loophole’ helps prevent families falling into inheritance tax trap

With more and more people becoming liable for inheritance tax (IHT), experts at Whitley Stimpson are urging families to consider using a little used loophole to reduce its impact.

Under the “normal expenditure out of income exemption” rules, individuals can donate sums of any size if they can be considered part of “normal expenditure.”

This means the amount donated should be in line with the individual’s general outgoings and made on a regular basis from their income which could consist of pensions, dividends, interest, rent or salary.

No compromise should be made on living standards because of the gift so if the donor must draw on their savings as a result, then HMRC is likely to dismiss the claim.

Significantly, the allowance can also be used on top of the annual £3,000 exemption.

Despite offering potentially huge savings in IHT, the exemption found the Section 21 of the Inheritance Tax Act 1984 has had relatively little take-up.

Last year, just 430 families used the allowance but between them guarded £67m from death duties. But with the IHT threshold continuing to be frozen at £325,000, a record 40,000 people became liable for it in 2022 – up from 33,000 the previous year.

Jonathan Walton, Director at Whitley Stimpson, said: “More and more people are falling into the IHT trap perhaps without realising.

“This exemption is buried in the detail but there has never been a better time to make use of it and allow families and charities for example to benefit instead of paying 40 per cent tax on money earned over a lifetime into HMRC coffers.”

To claim, applicants must complete an IHT403 form detailing income, expenditure and gifts made from surplus income.

Jonathan added: “This means good record keeping is vital, but we can help with that as part of the accounting process and the saving is likely to be highly beneficial.”

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