With harsher inheritance tax rules looming, many Britons may be looking for ways to better protect their wealth and avoid the potential widening of the tax net. One “very effective” strategy gaining popularity is the “normal expenditure out of income” exemption, a wealth management firm has said.
This exemption allows individuals to make regular gifts of any figure as long as these gifts come out of their income and do not affect their usual standard of living. If the rules are followed correctly, these gifts leave the estate immediately, meaning they are not subject to the usual seven-year rule that applies to most other gifts.
This makes it an effective way to reduce IHT liabilities, as it allows individuals to transfer wealth while maintaining their lifestyle and without impacting their estate.
Gary Smith, partner in financial planning at wealth management firm Evelyn Partners, said: “We are seeing increased interest in the ‘normal expenditure out of income’ exemption to IHT, which allows people to make regular gifts over long periods of quite substantial amounts as long as they come out of income and do not impact their usual standard of living. These amounts – if the rules are followed correctly – leave the estate immediately so can be a very effective way of reducing IHT liabilities.”
For many families, this strategy provides an important opportunity to reduce the value of their estate in a tax-efficient manner. It’s especially useful for those with ongoing income, such as pensioners or individuals with investment income, who wish to make regular gifts to family members or charities.
But, Mr Smith cautioned: “This is something that some families might want to speak to their financial planner about, because this really is an area where professional help is necessary.”
The popularity of this strategy has surged as clients seek ways to mitigate IHT liabilities, especially in light of upcoming changes. In 2027, Chancellor Rachel Reeves plans to include unused pension pots in taxable estates.
As a result, individuals are exploring ways to reduce the value of their estates while they still can.
In addition to regular gifts, individuals are also taking advantage of the annual gift allowance of up to £3,000 per tax year (£6,000 for couples). Gifts made within this allowance are exempt from IHT, even if the giver dies within seven years.
Mr Smith said: “Gifting has been a major theme of our discussions with clients after the changes to the inheritance tax regime announced at the Budget, with many keen either to use their annual gifting allowances or to start the seven-year clock ticking on a larger gift.”
As the IHT nil-rate bands – the tax-free thresholds – are set to remain frozen until 2030, Mr Smith noted: “Many modest estates are being dragged into the IHT net. The annual gifting allowances can make a difference by taking the estate below these levels.
“This can save not just money that would otherwise go to the Treasury but also time and aggravation for the executors who would otherwise have to calculate and pay an IHT bill before probate is granted.”
