Inheritance tax 'little known loophole' has saved families millions
A little known inheritance tax loophole saved British families millions last year
PA
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 yearPAThe “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. PAJust 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.”
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