Latest news with #surplusIncome
Times
23-05-2025
- General
- Times
How do gifts out of surplus income reduce inheritance tax?
Q. I am the beneficiary in the will of a relative who recently died in the US. She is British by birth but has lived in the US for more than 60 years. Will I have to pay inheritance tax on this bequest? My second question is that my wife and I are both in our nineties so our family is unlikely to benefit from the seven-year rule on any gift to them. How can I make 'the gifts out of surplus income rule' work for me?Name and address supplied It's unlikely that you will have to personally pay inheritance tax on the bequest. In the UK at least, your relative's executors would be required to pay any inheritance tax from the estate as
Telegraph
07-05-2025
- Business
- Telegraph
The ultimate inheritance tax break used by just 2pc of people
Have you been dragged into paying inheritance tax? Get in touch: money@ Families are missing out on a lucrative tax break which could cut their inheritance tax bills by tens of thousands of pounds, data suggests. The 'gifts out of surplus income' rule allows individuals to give away money without falling foul of the seven-year inheritance tax rule. However, just 480 estates benefited from the tax break in 2021-2022, figures shared by HM Revenue & Customs (HMRC) under Freedom of Information revealed. This represented just 1.7pc of the 27,800 estates which paid inheritance tax that year. In 2020-2021, 510 estates claimed the relief – or 1.9pc – compared to 500 the year before. As Labour gears up to levy inheritance taxes on pension pots from April 2027, experts said that the little-known relief could become much more popular. Inheritance tax is charged at 40pc on the value of an estate worth more than £325,000. Homeowners get an additional £175,000 allowance, and couples can share their allowance, raising the limit to £1m. Any gift made more than seven years before death is exempt from inheritance tax automatically. Taxpayers also have a £3,000 annual gift allowance – which is designed to cover events including birthdays and religious holidays. But the surplus income rules mean that if families can prove that there were regular payments – which did not have a negative effect on the giver's normal finances – then that money is also exempt. Giving an annual £10,000 gift towards mortgage repayments or private school fees, for seven years could reduce an inheritance tax bill by £26,8000, analysis by investment platform Interactive Investor found. Rachael Griffin, tax and financial planning expert at Quilter, which submitted the information request, said: 'Given the upcoming pension tax changes in 2027, we expect to see a sharp increase in the use of this exemption as more people look for ways to mitigate inheritance tax liabilities.' But Ms Griffin warned that claiming the exemption is not as simple as just handing over cash to relatives without keeping track. She said: 'However, good record-keeping is absolutely essential. HMRC requires clear documentation proving that gifts were made from surplus income rather than capital, and that they do not reduce the donor's standard of living.' Tom Selby, of online platform AJ Bell, said: 'It is inevitable and entirely logical that as the number of households being pulled into inheritance tax increases, the number of people aiming to take advantage of gift rules to minimise the tax bills faced by their beneficiaries will rise. 'There is already evidence of savers taking action ahead of this proposed change in 2027.' Rachel Reeves announced in her inaugural Budget last October that pensions would be subject to inheritance tax from April 2027. Steven Cameron, of pension provider Aegon, said: 'This approach can also be followed if an individual can show they have surplus income from their pension once in payment although this is likely to be feasible for only a very small number of individuals. Mr Cameron said anyone looking to take advantage of the tax relief should seek professional advice, as 'there are many rules to follow here'. The Office for Budget Responsibility expects that 9.7pc of estates will pay inheritance tax by 2029-2030 as a result of Ms Reeves's changes, up from 4pc currently. Bereaved families paid a record-breaking £8.2bn in inheritance tax last year, ahead of Labour's death duty raid on pensions. The receipts, paid in the year to March, marked a £750m increase on last year's record high, according to HMRC data. The Treasury estimates the levy will raise more than £14bn in 2029-30. The £325,000 nil-rate band, which was set in 2009, would be £510,9211 today, if it had risen with inflation. A Treasury spokesman said: 'We continue to incentivise pensions savings for their intended purpose – of funding retirement instead of them being openly used as a vehicle to transfer wealth – and more than 90pc of estates each year will continue to pay no inheritance tax after these and other changes.'
