Year End Tax Planning 2021/22

As a new tax year approaches, it is important to ensure you are in the best financial position to help protect and grow your future wealth.

Our Bitesize Tax Planning provides you with details of the key allowances and reliefs available to you as well as tax planning tips in easy to consider sections.

This article looks at Inheritance Tax (IHT) Annual and Small Gifts Exemption.

A gift from one individual to another, not covered by one or more of the gifting exemptions, constitutes a Potentially Exempt Transfer (PET). This will enable you to make gifts of an unlimited value, and have them become exempt from Inheritance Tax. If you survive for seven years from the date of the gift, no Inheritance Tax arises on the PET.

Each tax year, you can give away £3,000 worth of gifts (your ‘annual exemption’) tax-free. You can also give away wedding or registered civil partnership gifts up to £1,000 per person (£2,500 for a grandchild or great grandchild and £5,000 for a child).

In addition, you can give away regular sums of money from your excess income. Unlimited amounts can be immediately outside your estate, so long as your standard of living isn’t reduced.

You can also give as many gifts of up to £250 to as many individuals as you want. Although not to anyone who has already received a larger gift from you in the same tax year. None of these gifts are subject to Inheritance Tax.

Further information can also be found at gov.uk.

Normal Expenditure out of Income Exemption

Normal expenditure out of income is a valuable exemption, sometimes called gifts out of surplus income. It is probably one of the most valuable exemptions but often underused. The 7-year rule does not apply, and it may not disturb any other exemptions, or constitute a chargeable transfer.

There are three important requirements:

  1. The gifts form a part of your ‘normal expenditure’ and are paid out on a regular basis.
  2. The gift is made out of your income.
  3. You are left with enough income to maintain your normal standard of living.

To assess whether you have sufficient income to utilise this exemption and to satisfy conditions 2 and 3, you should:

  • Consider how much net income you receive after tax
  • Review what your normal expenditure amounts to – there is no actual legal definition of what ‘normal expenditure’ amounts to but is based on an individual’s particular circumstances. This of course may fluctuate from year to year.

For more information or to discuss any of the issues raised in this article, please contact your adviser, or call us directly on 0161 819 1131. Further information can also be found at gov.uk.

See the other topics in our Bitesize Tax Planning series:

Personal circumstances differ and not all of this information is applicable to every client and/or their business, this information is general in nature and should not be relied upon without seeking specific professional financial advice.

The financial conduct authority does not regulate tax advice, estate planning or will writing.

The content in this article is for your general information and use only and is not intended to address your particular requirements. Articles should not be relied upon in their entirety and shall not be deemed to be, or constitute, advice. Although endeavours have been made to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No individual or company should act upon such information without receiving appropriate professional advice after a thorough examination of their particular situation. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of any articles.

Thresholds, percentage rates and tax legislation may change in subsequent finance acts. Levels and bases of, and reliefs from, taxation are subject to change and their value depends on the individual circumstances of the investor. The value of your investments can go down as well as up and you may get back less than you invested. Past performance is not a reliable indicator of future results.

Pareto Financial Planning Ltd is authorised and regulated by the Financial Conduct Authority.