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Tax Compliance, Wealth Management

Giving gifts out of income

Giving gifts out of income
Amal Shah

By Amal Shah

11 Jul 2023

Giving a monetary gift to your family and friends while you’re still alive can be a smart move. Not only does this practice help reduce the value of your estate for Inheritance Tax (IHT) purposes, but it also gives your loved ones an immediate financial boost.

Key takeaways

  • The gifts must be part of your normal expenditure – essentially there should be evidence of an intention to make regular gifts over a period of time. This can be shown, for example, by a letter stating the intention to make the gifts, or a clear pattern of payments. There is no time span over which you must show a habit of giving. HMRC guidance suggests that a reasonable time span would usually be three to four years. The gifts do not have to be given to the same person or always be of the same amount. Nonetheless, a pattern must be established. Furthermore, the gifts you give can’t derive from money that has been set aside. Instead, the gifts must be made from your general pool of cash.
  • The gift must be made out of income – “income” can include salary, commission, rent, dividend income and interest which has been paid out to you. However, HMRC are mindful of accumulated income and will often regard it as becoming capital if it’s untouched for more than two years.
  • When making a gift, you must be left with sufficient income to maintain your normal standard of living – this is measured according to your individual standard of living and not that of an average person. Gifts will not normally qualify for the tax exemption if you have to resort to using accumulated capital to meet your living expenditures.

However, let’s face it, estate and tax planning can get complicated quite fast, with a lot of guidelines and rules to bear in mind. Therefore, it’s a good idea to get some professional advice to avoid making any common blunders when you’re dispersing any surplus cash to your loved ones.

HMRC’s bottom line

Before making any decisions regarding monetary gifts, it’s important to understand the way in which HMRC interprets making gifts out of income.

Generally, you can regard ‘gifts out of income’ as exempt from IHT. For the gifts you’re giving to qualify, they need to form part of your normal expenditure. In other words, they’ll have to be made out of income – not family assets you’ve inherited – and they also can’t reduce your usual standard of living. This tax exemption is latterly claimed by the executors of your estate. So, to avoid causing any headaches for your next of kin, it’s important to keep comprehensive records of both gifts which are disperse, as well as your normal expenditure.

Using the tax benefit

While you’re alive, you’ve got something called the ‘gift allowance.’ The threshold is £3,000 a year, and it’s also known as your annual exemption.

This means you can give away assets or cash up to the value of £3,000 in a tax year without worrying about it getting added to the value of your estate for IHT purposes.

If you’re able to satisfy the conditions of the exemption, the gifts are then exempt from IHT immediately. You do not have to survive seven years from the date of the gift for your family to swerve paying more than they need to. If your circumstances change at any point, you can stop making the gifts without losing the exempted status of those you’ve already made.

Here’s a bonus point which is an attractive quality of gift allowances: if you don’t use up your annual exemption in a given tax year, you can carry it forward to the next one. However, it’s important to be aware that you can only use it in the following tax year and can’t retain it for any longer.

If you would like further information or guidance on giving gifts out of income, contact our Wealth Management Partner David Horowitz today.

This article is only for general informational and educational purposes. It is not offered as and does not constitute financial advice. You should not act or rely on any information contained in this article without first seeking advice from a professional. The Financial Ombudsman Service is available to handle individual complaints that clients and financial services businesses aren’t able to resolve themselves. To contact the Financial Ombudsman Service, please visit this site. Gerald Edelman Wealth Limited is an appointed representative of Best Practice IFA Group Limited which is authorised and regulated by the Financial Conduct Authority. 


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