Saving Inheritance Tax for High Earners

Did you know that if you have income over and above your living expenses, you may be able to put aside the excess into trust and it would be immediately free of inheritance tax (IHT)?

A commonly overlooked exemption when considering how best to mitigate the 40% IHT charge on death is the “normal expenditure out of income” (NEI) exemption.

The benefits of an NEI trust are that there is no upper limit on how much you can put into trust for your children, grandchildren, or other nominated beneficiaries, with the gifts being immediately outside of your estate.  The normal 7-year rule that applies to most gifts does not apply.

By using a trust, you can retain control over the use of the funds (you can be a trustee if you wish) and you have flexibility to decide who should benefit, when and how, including multi-generational planning.  Unfortunately, you cannot have any funds back that you put into the trust so you need to be sure of what you can afford to give away.

In order to qualify, you must be able to demonstrate that any income gifted is truly excess to your needs (you cannot dip into your capital assets to cover your expenses) and that it is part of a pattern of giving, whether that is monthly, quarterly or annually, generally for at least 3 years.

As an example:

  • If you have excess income of up to £100,000, you could save up to £120,000 of IHT by gifting this excess income into trust for 3 years.
  • If your excess income was £500,000, the potential saving increases to £600,000 over the same period.

In both examples, the savings can continue to grow as long as the excess income is gifted.

At Ludlow Trust, we work with a large number of clients making use of this valuable exemption, whilst also looking at other opportunities such as gifting their IHT nil rate band (currently £325,000), getting appropriate wills in place and/or utilising Gift Aid to establish a charitable trust , maximising the charitable gift whilst reducing their personal tax bill.

Speak to one of our expert advisors about how we might be able to help you with your estate planning, please call us on 020 4534 2750 or email [email protected].

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