By Sue Wakefield


Many people are aware that they can freely gift income with no tax consequences but not many take advantage of the Surplus Income inheritance tax exemption and gift excess income into a flexible protected discretionary trust. This exemption becomes extremely powerful when the excess income is paid into such a trust and can accumulate over time.

There is a possibility that this very specific exemption may be removed as the Treasury look to recoup costs and many believe that inheritance tax reform is very likely. So now is a very good time to secure this valuable exemption and clients with excess income should consider this.

Benefits include the fact that there is no limit to the amount of excess income that can be gifted and no requirement to survive 7 years, the funds are immediately outside of the estate for inheritance tax purposes. Many people are happy to make gifts of income absolutely but where amounts are large or beneficiaries are young or vulnerable then the absolute gifting route may not be appropriate.

This is where a Discretionary Trust works perfectly; it ensures the inheritance tax exemption is used now whilst still available but allows the funds to accumulate, thus protecting family wealth and passing funds to the next generation in a controlled manner, for example payments can be made for university costs or a house purchase at a more appropriate time in the future.

There are some conditions to satisfy to be able to claim the inheritance tax exemption ( IHTA 1984, S 21) –

  • Gifts must be from income, this includes earned income, dividends, rental income or pension income but not capital.
  • Gifts must be regular or usual in nature and keep a consistent pattern but payments do not have to be the same amount or over a set period of time
  • Gifts should be from current income; accumulated income from previous years may be deemed as capital and therefore ineligible
  • There must be no negative impact on the donor’s standard of living after making the gift
  • It is important that clear records are made evidencing the gifts and the intention to make regular payments. These will be used by the personal representatives as evidence to claim the exemption.

ZEDRA can support with the creation and ongoing administration of such trusts ensuring the record keeping is clear and consistent and supporting the ability to claim the inheritance tax exemption in due time.

For more information, call us on 01565 748 808.