Earlier this year, a wealthy political donor discovered that giving money away is rarely as simple as it looks. Jeremy Hosking had given more than £1.7 million to political campaign groups over several years and argued the gifts should be exempt from inheritance tax because they came out of his surplus income. A tax tribunal disagreed.
HM Revenue & Customs pursued him for £349,309 in tax on the donations, even though he had more than enough income to make them without touching his savings.
How does the inheritance tax exemption work?
Many people are aware that a gift only escapes inheritance tax if the giver survives seven years. Fewer know that gifts made regularly out of surplus income can be exempt straight away, with no waiting period at all. It is one of the more useful reliefs available, and one of the least understood.
The rule, called normal expenditure out of income, applies when a gift is part of your regular spending, comes from income rather than savings, and still leaves you enough to maintain your normal standard of living. Meet those conditions and the value of the gift falls outside the estate immediately. It suits people whose income comfortably exceeds what they spend, who might otherwise watch their savings, and their eventual tax bill, grow year on year. Used consistently over a number of years, it can shift substantial sums out of an estate without the giver noticing any real difference to how they live.
Why did Jeremy Hosking’s case fail?
Hosking had ample income to spare. His case failed because his giving was too erratic to count as a genuine habit: donations of wildly different sizes, made without any fixed plan or amount. The tribunal was clear that having money to spare is not enough. What matters is being able to show a settled, deliberate pattern of giving, whether built up over years or set out as a stated intention and then followed through.
What records should you keep?
Working out whether a gift qualifies means adding up a person's total income, from pensions to bank interest, against everything they spend, from utility bills to holidays. The exercise is not complicated, only laborious, which is why so many people put it off. Whatever is left over can usually be given away safely. The trouble is that this calculation is often done after someone has died, when executors are left trying to reconstruct years of financial records from scratch. Completing the relevant HMRC form as gifts are made, rather than leaving it all to the family afterwards, turns a difficult job into a straightforward one.
Can you give away more than £3,000 each year?
A related misconception is that the £3,000 annual gift allowance is the most a person can give away tax-free each year. It is not a limit, only a guarantee. Anyone with sufficient spare income can give away considerably more under the normal expenditure exemption, provided they can show the pattern and the paperwork behind it.
Planning regular gifts from surplus income
For those with more income than they need, a little planning can be worth a great deal to the people left behind. Anyone considering regular gifts of this kind should keep clear records from the outset and take advice early, so that generosity is not undone by a tax bill nobody saw coming. Our Private Client team can advise on inheritance tax planning and help you structure regular gifts in a way that supports your wider estate planning.
