Exemption from Inheritance Tax: gifts out of surplus income

Aveton123

Hi. Anyone know if an inheritance in cash that has been received can then be passed on as a gift to someone else under the 'surplus income' exemption? For example, if someone already has plenty of money to cover their future expenses and receives a lump sum bequest, can that simply be gifted to another person and be exempt? Thanks very much.

eskbanker

I wouldn't see that as falling within the 'regular/normal' stipulations:

You can make regular payments to another person, for example to help with their living costs. There’s no limit to how much you can give tax free, as long as:

• you can afford the payments after meeting your usual living costs
• you pay from your regular monthly income

These are known as ‘normal expenditure out of income’.

https://www.gov.uk/inheritance-tax/gifts

It may be possible to handle this situation via a deed of variation on the will, to redirect the bequest to the desired recipient?

[Deleted User]

I doubt that would fall under normal expenditure out of income. Regularity is also important. 

Was a Deed of Variation on the will considered?

More_complicated_than_that

The word "income" is not defined for this bit of the inheritance tax legislation and there is a little case law on what is or is not income.  If you sell your house, the proceeds is not income but capital.  Similarly, if you receive an inheritance I don't see that as income either. 

The time limit for making a deed of variation is two years after death, even if the cash has already been distributed.

Keep_pedalling

An inheritance is not income it is capital, so no you can’t do this. If the deceased died less than two years ago then a deed of variation would be the best option as that in effect changes the terms of the will and the 7 year rule does not apply. This won’t work however if  deceased and beneficiary were married or civil partners.

Aveton123

Thanks for all your comments. Maybe let me explain with a few more details. My aunt's cousin died in November 2020 and my aunt finally received a large sum in cash as her part of the inheritance in September 2022. It basically doubled the amount in her bank account. Her monthly income from state and employer pensions already more than covered her expenses. To avoid a large IHT bill, she agreed to gradually pay me in lump sums when it was possible to do so, based on when her fixed bonds were maturing. Given that the inheritance from her cousin was basically a 'bonus' that she would never need to touch, why isn't that viewed as 'income'? Bearing in mind too that the estate of her cousin already paid a sizeable amount of IHT!

eskbanker

Aveton123 said:

Given that the inheritance from her cousin was basically a 'bonus' that she would never need to touch, why isn't that viewed as 'income'?

As above, the test defined on the gov.uk IHT pages is whether "you pay from your regular monthly income", so even if the lump sum was to be considered income, it certainly isn't regular monthly income.

Edit: would she have been happy to pay income tax on it if it had been categorised as income?!

Aveton123

Ok thanks. Let's hope the Chancellor reduces or eliminates this tax on March 6!

Albermarle

Aveton123 said:

Ok thanks. Let's hope the Chancellor reduces or eliminates this tax on March 6!

That would be good, apart from him having to find up to £10 Billion in other taxes to replace it.