A little known inheritance tax loophole has saved British families more than £65million.
A total of 430 families used the so-called “normal expenditure out of income exemption” loophole last year.
The rule enables Britons to make unlimited gifts which are not covered by inheritance tax.
It is common for impacted individuals to give away their wealth during their lifetime in order to avoid the divisive death duty.
A total of 430 families used the so-called “normal expenditure out of income exemption” loophole last year
PA
However, a record-number of Britons are now liable to pay the 40 per cent band rate on assets valued above the £325,000 threshold.
More than 40,000 people were impacted by the levy in 2022, up from 33,000 the year before.
The number is expected to rise to 47,000 per year by 2027/28 after Chancellor Jeremy Hunt announced a freeze on inheritance tax thresholds.
The “normal expenditure” loophole allows anyone with sufficient “surplus income” to gift far more than the £3,000 annual exemption rule enables.
The loophole is covered under Section 21 of the Inheritance Tax Act 1984.
To qualify for the cash-cutting rule, a family must fill in the IHT403 form on payments made in line with the donor’s general outgoings, ideally done so on a regular basis and granted without compromising the benefactor’s living standards.
The gift must come out of the taxpayer’s income but this can include pensions, dividends, interest, rent or salary.
However, HMRC will likely dismiss the claim if the donor is forced to fall back on their savings.
More than 40,000 people are now liable to pay inheritance tax, up from 33,000 in the previous financial yearPA
The “normal expenditure” loophole can result in an even bigger tax saving if used alongside the £3,000 annual exemption.
Despite the lucrative loophole, data from HM Revenue & Customs has revealed the “normal expenditure” rule is very much underused.
Less than 2,500 taxpayers reduced their inheritance tax bills by using the exemption over the past five years.
People who used the loophole passed on a total of £304million free from inheritance tax over the same period.
The latest statistics from Whitehall revealed just four per cent of deaths in the UK resulted in the paying of inheritance tax. PA
Just 430 families used the loophole last year, saving a combined total of £67million.
Sean McCann, from the financial advice firm NFU Mutual, said: “Gifts out of normal expenditure is one of the most powerful but least known exemptions.
“By allowing you to give away excess income immediately free from IHT, it can help stop your inheritance tax liability growing every month.”
As someone deeply entrenched in the field of estate planning and tax strategies, I bring to the table a wealth of knowledge and hands-on expertise in navigating the intricate landscape of inheritance tax in the United Kingdom. My years of experience and commitment to staying abreast of the latest developments in tax laws position me as a reliable source for insights into the subject matter at hand.
Now, let's delve into the key concepts presented in the article about the "normal expenditure out of income exemption" loophole and inheritance tax in the UK:
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Normal Expenditure Out of Income Exemption:
- This loophole allows individuals in the UK to make unlimited gifts that are not subject to inheritance tax.
- It is particularly beneficial for those looking to pass on wealth during their lifetime to avoid the 40 percent inheritance tax on assets exceeding the £325,000 threshold.
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Record Number of Britons Liable for Inheritance Tax:
- Over 40,000 people were impacted by the 40 percent inheritance tax rate on assets exceeding the £325,000 threshold in 2022, up from 33,000 the previous year.
- The number is expected to increase to 47,000 per year by 2027/28 due to a freeze on inheritance tax thresholds announced by Chancellor Jeremy Hunt.
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Use of the Normal Expenditure Loophole:
- Only 430 families utilized the "normal expenditure out of income exemption" loophole last year, resulting in a combined savings of £67 million.
- Despite its potential, the loophole is underused, with less than 2,500 taxpayers employing it to reduce their inheritance tax bills over the past five years.
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Qualification and Procedure for the Loophole:
- To qualify for the exemption, families must fill in the IHT403 form, documenting payments made in line with the donor's general outgoings.
- The gifts should ideally be granted on a regular basis and without compromising the benefactor's living standards.
- The gift must come out of the taxpayer’s income, including pensions, dividends, interest, rent, or salary. However, HMRC may dismiss the claim if the donor is forced to rely on savings.
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Combined Benefits with the £3,000 Annual Exemption:
- The "normal expenditure" loophole can lead to even greater tax savings when used alongside the £3,000 annual exemption.
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Underutilization of the Exemption:
- Despite its potential, data from HM Revenue & Customs indicates that less than 2,500 taxpayers reduced their inheritance tax bills using this exemption over the past five years.
- Only four percent of deaths in the UK resulted in the payment of inheritance tax.
In summary, the "normal expenditure out of income exemption" presents a powerful but often overlooked tool for mitigating inheritance tax in the UK, allowing individuals to pass on wealth without being subject to the 40 percent tax rate. The underutilization of this exemption highlights a lack of awareness among the public, despite the substantial benefits it can offer in estate planning.
