USE YOUR INCOME TO AVOID INHERITANCE TAX

One of the least used ways of passing on wealth to the next generation is 'Gifts from normal income'.

Most people don't realise that if they can establish what they normally spend on home, bills and day to day living, they can transfer the balance to their children on a regular basis. So if you spend £25,000 a year from family income of £50,000 pa and save £25,000 pa, you can transfer the £25,000 balance to your children and your executors can argue that this is a 'Gift from normal income'. As such it cannot be taxed under the current tax rules. To be completely safe, you should transfer on an annual basis at least and keep records of your income and spending.

However, if you have savings of £100,000 which you accumulated over 5 years (assuming savings of £20,000 pa and therefore under the £25,000 pa excess of income over expense)you could transfer this to your children and have your executors claim exemption on the baisis that this was accumulated income, waiting to be transferred. In a recent test case, the executors won and the capital did not suffer the tax.

Gifts from normal income are not subject to the 7 year rule and could, theoretically, be done as a 'Deathbed' measure.

However, I would think, the IR are currently very busy thinking on how they can close this opportunity off.




Posted on 27 November 2006 at 11:35 by John