How gifting from income can reduce your estates IHT burden

The dilemma in this situation is that if that excess income is retained it adds to that person’s eventual IHT problem, being either taxable on death or the subject of a gift of capital during lifetime which, as a potentially exempt transfer, needs the donor to survive for the full 7 years after the gift is made before it falls out of their estate.

What is often overlooked is that if the individual had decided to make regular gifts of some or all of that surplus income, those gifts would be completely exempt from IHT; the 7 year rule would not apply to those gifts. Also, the gifts out of income rule takes priority over other exemptions, such as the £3,000 annual exemption, which would remain available to use for gifts out of capital.

This is an extremely powerful tax saving tool for those who are able to take advantage of it. Aside from there being no requirement to survive for 7 years after each gift if the exemption applies, in the event that for some reason a gift exceeded the amount of surplus i