Budget 2014 – Brave new world

Spring Budgets have had little to promise or offer UK savers and investors in recent years, apart from setting out the depth of the economic challenge ahead for the coalition government.

Only last year, the mood was subdued, with talk of a potential triple dip into recession and a long and bumpy road to recovery. The UK’s economy, twelve months on, is undergoing a regeneration and a rate of growth that is now the fastest in the Western world. As Britain looks towards a general election in May 2015, the Budget contained far-reaching changes for its savers and investors.

Chancellor George Osborne, in his address on 19 March, said the Budget rewarded “the makers, the doers and the savers” in Britain. And the new pension and tax-efficient saving arrangements certainly offer radical reform of the UK’s personal finance landscape and welcome breaks for savers and investors after four years of austerity. A significant change in pension arrangements has lifted restrictions on access to pension pots and made it more attractive for individuals to invest for their retirement through pensions. And the reform of Individual Savings Accounts (ISAs) brings a very welcome increase in the annual allowance to £15,000 from July this year.

The boost that the 2014 Budget has given to investors, however, comes amid continued austerity, with the government only halfway through the fiscal consolidation it embarked on in 2010. Public borrowing levels still remain at £108 billion for 2014 (www.parliament.uk, 21/3/14). When the coalition came to power in 2010, Osborne had planned to balance the budget by 2016. Instead, the aim is 2019 (www.gov.uk, 19/3/14). The recovery also remains prone to wider global risks, whether from China’s economy or Russian military action. Meanwhile, there are widespread concerns that the recovery has been driven by consumers running down their savings, while households are squeezed by living costs as prices rise faster than earnings.

But the good news for business, markets and households is that the UK economic recovery has entrenched. In March, the Office for Budget Responsibility (OBR) revised up its forecast for the pace of the recovery in 2014 to 2.7%, from 1.8% a year ago (when its estimate for 2013 growth was a mere 0.6%). The OBR also expects earnings will grow by 2.5% this year, and inflation by 1.9%. Osborne, in these more secure conditions, packed his Budget with a broad range of pre-election giveaways, including a reduction in the savings tax rate and an increase in the personal tax-free allowance to £10,500 for 2015/16. The Budget also restated that the Inheritance Tax threshold will remain at £325,000 until April 2018.

For more information on the budget, please visit my website.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up.  You may get back less than you invested. The levels and bases of taxation and reliefs from taxation can change at any time. The value of any tax relief is generally dependent on individual circumstances.

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Tax year-end checklist

The end of the tax year provides a deadline for some important and valuable investment and tax planning opportunities which are often overlooked, but can help build wealth and also help keep it in your family.

Your plans may be specific – investing this year’s ISA allowance, topping up your pension, tax efficient savings for children or grandchildren, or making use of your Inheritance Tax gifting allowances – or you may feel that now is the time to complete a comprehensive review of your circumstances.

Whatever your plans, you must act by 5 April to avoid missing out on the opportunities provided by tax year-end. The below questions identify planning ideas to consider before the end of the 2013/14 tax year.

Q: Have you fully used your 2013/14 ISA allowance?
Q: Have you considered contributions to a Junior ISA for children and grandchildren?
Q: Have you utilised your annual Capital Gains Tax exemption of £10,900?
Q: Have you fully funded your pension for the 2013/14 tax year?
Q: Have you taken full advantage of any unused annual pension allowances since 2010?
Q: Have you reviewed the tax position of any death in service or pension benefits?
Q: Have you considered your small gifts exemptions or instigating regular gifts from income to reduce your Inheritance Tax liability?
Q: If you will be affected by the reduction in the personal pension allowance, have you considered where to redirect excess contributions?
Q:Have you used your annual Inheritance Tax gifting exemption for 2013/14 and 2012/13?
Q: Have you discussed the possibility of tax efficient investment schemes?

To find out more tax year-end planning opportunities, please visit my website.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

The levels an bases of taxation and reliefs from taxation can change at any time and are generally dependent on individual circumstances. The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.


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The 2014 Budget

The 2014 Budget – how does it affect you?

Since the start of the New Year I have seen several clients who wished to maximise their pension contributions before the reduction of both the Annual Allowance, from £50,000 per annum to £40,000 per annum, and also the reduction of the Lifetime Allowance, from £1.5 million to £1.25 million, both from 6th April 2014.

As you will undoubtedly be aware, the Chancellor delivered his Budget Statement on 19 March, and surprised many with some far-reaching – and much welcome – reforms of pensions and savings.

Pronouncing it a Budget for “makers, doers and savers”, George Osborne put the interests of savers and pensioners at the heart of his measures.

For more information about the Budget and how it might affect you, please visit my website.

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Seize the day – opportunities to build and protect capital before the end of the tax year

From pension savings to estate planning, the end of the tax year offers an array of opportunities to build and protect capital.

The last few weeks have been incredibly busy as clients look to maximise the opportunities to save more tax efficiently for this lengthier retirement.

The ageing population is perhaps the biggest challenge facing governments, financial institutions and savers today. People are living longer – many of us could spend a third of our lives in retirement, and we will therefore require more savings to match our longevity. The cost of this demographic time bomb has already pushed Britain’s government to raise the state retirement age. As politicians look to contain pension budgets, individuals will need more than ever to take advantage of investment and tax-saving opportunities provided by pensions.

Despite the wider picture of falling levels of savings and rising numbers of people heading towards retirement, there is an array of initiatives in place for individuals to pursue an income for retirement. And, with the government keen to encourage us all to save, significant tax advantages are in place for those contributing to a pension scheme.

A carefully drawn-up plan can help realise the twin objectives of reducing tax liability and saving for retirement. However, the new tax year will bring an extra pressure. The government has reduced the amount of pension benefits that can accrue, known as the ‘lifetime allowance’, to £1.25 million from £1.5 million. It is estimated that this will affect as many as 360,000 wealthier individuals, who could help to mitigate a 55% tax penalty by taking action before the end of the tax year (www.gov.uk, 11/12/12).

The new tax year will also bring a reduction in the annual amount that can be contributed to a pension. The allowance will fall from £50,000 to £40,000, which makes it even more important to maximise the current year’s contribution. Individuals who have not fully funded their pension in the previous three years also have the opportunity to make those contributions before 6 April. (The end of the tax year is the last opportunity to use the 2010/11 allowance and offers a potential tax saving of £22,500.)

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

The levels and bases of taxation and reliefs from taxation can change at any time and dependent on individual circumstances.

To read more about opportunities to build and protect capital before the end of the tax year, please visit my website.

If you require any assistance or have any queries on this or any other issue, please do not hesitate to contact me.

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Keeping the faith – What does 2014 hold for investors?

Keeping the faith – What does 2014 hold for investors?

After a strong run for equity markets, investors will be hoping that 2014 sees a transition to a sustained economic recovery.

More than five years after the financial crash, many investors and savers remain cautious despite a growing sense of hope emanating from Britain’s households and businesses. Although there are sound reasons for this wariness as the world slowly emerges from its economic difficulties, the recent strong returns from equity markets reflect increased optimism and confidence that the foundations of recovery are in place.

And 2013 will go down as an outstanding year for global equities, and developed markets in particular, supported in part by monetary policies on either side of the Atlantic that have propped up asset prices and investor confidence as global economic recovery gathers pace.

Despite the economic and financial challenges since 2007, many investors who retained faith in equities have achieved good returns in the intervening years. In these times of easy money, underpinned by the economic policy of financial repression – where interest rates and bond yields are kept low to reduce the cost of government debt and stimulate economic growth – savers understandably feel that they are suffering for the benefit of those who borrowed too much in the past. And, despite an outlook of lower inflation, it seems likely that cash savers will continue to struggle to find real returns from bank or building society deposits.

So what can we expect in 2014 and beyond? 

The prevailing economic conditions of the last few years – slow growth, low interest rates and low inflation – look set to persist, but it is an environment that should support further gains from equity markets. The pace of the US Federal Reserve’s exit from its third Quantitative Easing (QE3) programme, which it announced at its final meeting for 2013, will continue to preoccupy markets. However, the US central bank has signalled that it intends to reduce gradually the monthly asset purchases with the view to an eventual end by late 2014.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested. Equities do not provide the security of capital associated with a deposit account with a bank or building society.

To read more, please visit my website.

Should you have any queries, please do not hesitate to contact me.

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Facing the future

Facing the future

Searching questions about our saving and investment habits need to be answered as the gap between needs and reality widens.

These days we are likely to live longer, healthier lives. The Office for National Statistics predicts that by the mid-century more than 7% of the UK population will be over 85 years old. Longevity is undoubtedly a blessing, but it comes at a cost. The reality is that we are not saving enough or spending enough time planning for our future.

Successive governments have urged us to save more as the cost of living rises, but the combination of falling real wages, low interest rates and steady inflation is chipping away at our attempts to put in place the foundations for future wealth. Clearly, there is a disparity between our expectations of future lifestyle and the reality of what we are doing to realise those designs.

But, although the gap is acute, the solution and action is not beyond the means of individuals and households.

The government make available a range of allowances which permit you to save far more tax efficiently, thereby ensuring that more of your money is allocated to your savings pots, whether in the form of cash, investments or pensions. The allowances are available to you on a tax year basis and therefore it would be advisable to discuss the opportunities before the middle of March, to permit sufficient time to make the appropriate arrangements.

To read more on facing the future of our savings and investment habits please visit my website.

Should you have any queries, please do not hesitate to contact me.

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Profit extraction for new businesses

Profit extraction for new businesses

Given the current economic climate, many clients are investigating the opportunities of working for themselves. It is therefore absolutely imperative that, if you are considering such a move, you are fully briefed on the most efficient way of recompensing you and your staff.

As most shareholding directors will be well aware, irrespective of prevailing Corporation Tax rates, personal Income Tax rates and National Insurance (NI) rates, one of the most tax-efficient way to take profit (or income) from a company is via dividends. However, dividends can only be paid out of a profit; meaning that for a recently established business they will not be an option. The question is what are the alternatives for profit extraction?


Much has and will continue to be written about the attraction of dividends as a method of extracting profits for directors and shareholders. There are however a number of situations in which paying dividends is simply not an option:

• For new companies

• For companies without retained profit

• For companies with accumulated losses

• Where there is a desire to make a distribution of available profit favouring one shareholder over, or more than, another.

Salary or bonuses

The most clear and simple alternative to adopting a dividend strategy is the provision of a salary and/or bonus. However this comes with personal Income Tax and NI for both the individual recipient and the company, payable through the PAYE system.

Benefits in kind

Although a package of benefits in kind will broadly result in the same liability to Income Tax, it can result in a delay of the payment to HMRC and, more significantly, can reduce NI. As stated above, tax on salary or bonuses is paid under the PAYE system, ordinarily on a month-by-month basis. The tax liability in respect of benefits in kind, initially at least, is not assessed monthly and can be delayed for up to 20 months.

Important note

In order to secure the advantages outlined, it will be necessary for the company to contract directly with the supplier in respect of the goods or services provided. For example, where the company is meeting utility bills, the invoice should be addressed to the company and not the individual. Further, HMRC will adjust the recipient’s PAYE codes so that the tax on benefits in kind is ultimately collected via their salary. This, of course, will take a number of years by which time, hopefully, XYZ Ltd will have sufficient ongoing or retained profits to move from benefits in kind to dividends.


Dave and Julia start XYZ Ltd in April 2013. They elect to pay themselves a modest salary of £20,000 per annum each plus a tailored benefits in kind package including covering the cost of a variety of household bills and school fees. If we assume the total value of this package was £20,000 a year for each of them, both Dave and Julia would be obliged to declare their benefits in kind to HMRC when they submit their 2013/14 Self Assessment returns. Importantly the £4,000 each has due (£20,000 x 20%) will not be payable until 31 January 2015.

The NI advantages of benefits in kind come in two forms. Firstly, the absence of employee’s NI means Dave and Julia would each save up to £2,400 (£20,000 x 12%) compared to salary or bonus. Secondly, NI on the benefits in kind in respect of the employer liability is deferred. So, if XYZ Ltd pays a benefit in May 2013, any resulting employer NI wouldn’t be due for payment until 19 June 2014.

If you have any further queries about profit extraction for new businesses, or wish to discuss the financial planning opportunities available to you upon becoming self employed, please do not hesitate to get in touch.

The levels and bases of taxation and reliefs from taxation can change at any time. The value of any tax relief depends on individual circumstances.

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The single-tier State Pension – the case for change

The case for change

In his foreword to the government’s proposals (Source: The single-tier pension: a simple foundation for saving) to reform the State Pension scheme, the Minister of State for Pensions, Steve Webb, refers to the simplicity of the original model implemented by William Beveridge over 70 years ago. How things have moved on! To quote from the foreword, ‘… a piecemeal approach to pension reform has resulted in an extremely complicated pension system, where many do not know what they will get when they retire. An increasing reliance on means-tested benefits and a patchwork of add-ons, compensating for long-term decline in the relative value of the basic State Pension, compounds this complexity.’

The government’s proposal after a period of consultation is radical, but sensitive to the many voters who will be affected by any transition. It will save money in the longer term as it is currently proposed, but not to the same degree as the increases in State Pension age which are in train and likely to continue beyond 2028.


The minister offers some context for the reforms:

• 36% of people born in 2013 will live to become centenarians. In the 1940s only a minority of men lived to 65
• the number of women in work has increased by 50%. In 1948 only four out of ten women were in paid work
• the number of divorces has increased as a proportion of marriages from 11% in 1948 to about 50% in 2012
• over a third of those working today are self-employed or in part-time work
• the number of people saving in an occupational pension scheme has fallen from 12 million active members in 1967 to 8.2 million in 2011.

The single-tier pension

At the heart of the reforms is a measure to abolish the earnings-related part of the State Pension and move to a flat rate. The previous government had already legislated for a more gradual change to the flat rate in about 2030, but the latest proposals for change are more precipitous.
The proposal is for the amount of the new pension to be set just above the minimum guarantee part of the current Pension Credit. That stood at £142.70pw for a single person in 2012/13 (£145.40pw in 2013/14) and the indicative single-tier pension was set at £144pw (£146.72pw in 2013/14). The pension will increase each year under the ‘triple-lock’ provisions (that is by the greatest of the increase in earnings, the increase in prices as measured by CPI, and 2.5%).

Under the current system, the basic State Pension in 2013/14 is £110.15pw and for those who have been employees, the maximum earnings-related pension is in the region of £130pw. Of course, these figures must be treated with caution. They are in respect of a single person and in any case, few people will qualify for the maximum earnings-related pension (and a number will not qualify for the full basic State Pension).

In order to qualify for the full single-tier pension, the individual will require a National Insurance contribution record of 35 years and a record of fewer than ten years will not qualify for a pension. Proportionate benefits are available for records from 10 to 34 years. This is a step backwards. Only recently the requirement for the maximum basic State Pension was reduced to 30 years and as little as one year’s contribution would qualify for a pension on a pro rata basis.

A simplifying feature of the new pension is that it will only be available in respect of the claimant’s own contributions. It will no longer be possible to claim or inherit a pension in respect of a spouse’s or partner’s contributions (assuming it was possible to understand what the entitlement was!).
Under the current rules, the State Pension can be deferred and will be increased by one-fifth of one per cent for each week of deferral (10.4% a year). The claimant has an option to take a lump sum instead of the increased pension.

The new rules will halve the rate of increase to 5.2% a year (1% for every ten weeks of deferral) and abolish the lump sum option.

The government is proposing to implement reform in April 2016 (one year earlier than originally planned).

Abolition of the Savings Credit

There will be a safety net for those who do not meet the contribution conditions and have little or no income from other sources or benefits. The guarantee credit element of the Pension Credit will be retained on a means-tested basis. However the government contends that the single-tier pension obviates the need for Savings Credit and this will be abolished.
It is projected that by 2050, the number of pensioners claiming Pension Credit will fall by a half; from 10% of all pensioners to 5% (Source: The single-tier pension: a simple foundation for saving). The argument here is that more people become entitled to the basic State Pension rather than relying on means-testing – with all that brings. Means-testing involved going cap in hand to government, asking for a subsidy; which became an emotive issue for many older people. It also involved the completion of a long financial questionnaire which was known to put off many eligible applicants.

Abolition of contracting out

There are many commentators who, with the benefit of hindsight, wish that contracting out had never happened. We only have to look at the intractable problem of equalising guaranteed minimum pensions (GMPs) to gain some insight into the technical problems that the option presents. However, abolition is a rather different kettle of fish and in consultation, employers have expressed concern at the sudden increase in National Insurance contributions that would accompany a withdrawal of the option.
Money purchase contracting out was abolished in April 2012. The proposal is that from April 2016, the option to contract out will be no more, with the ending of defined benefit contracting out. It will leave little trace other than GMPs, a legacy of court cases and a reduction in what the state will provide in respect of past accrual. We will look at this under ‘Transition’.

The way defined benefit contracting out has worked in the past is that in exchange for a reduction in National Insurance (the ‘rebate’) and the surrender of any accrual of earnings-related pensions, the scheme has been required to provide a guaranteed minimum pension (1978 to 1997) or benefits under a scheme that had to meet the Reference Scheme Test (from 1997). The Reference Scheme Test is, in effect, the standard required of a defined benefit qualifying scheme for automatic enrolment purposes.

The effect of abolition will be that:

• National Insurance contributions will increase.
• no special requirements will apply other than in respect of GMPs.
• there will be no reduction in State Pension accrual after 2016.

In effect, the only point of contention is likely to be the increase in National Insurance occasioned by the abolition of the rebate. This is recognised by the government’s proposals which propose that employers should be able to change scheme rules to reduce benefits without trustee consent. This comes with some important qualifications:

• it will not apply to past pension accrual and it is virtually impossible to reduce benefits that have already accrued by any other means
• an alternative would be to increase member contributions
• if there were to be a reduction in benefits under the scheme, this could be cushioned by the increase in State Pension
• any reduction in benefits without trustee consent would be limited to that required to offset the increase in National Insurance contributions


So far so relatively straightforward, but as any observer of the pensions scene knows, pensions involve such long timescales and such significant sums of money that transition from one idea to the next is extremely difficult. In this respect the proposals are bold.

Those who have reached State Pension age before the proposals are implemented will be unaffected by the changes. Those who retire after that date who have accrued benefits under the current scheme will be given credit for those benefits by way of a ‘foundation amount’. The idea behind the foundation amount is that individuals will be able to determine their entitlement for past accrual in 2016 (and do something about it if necessary) rather than having to wait until retirement.

The proposals identify four groups:

• Individuals who have a foundation amount equal to the full level of the single-tier pension. These are likely to be people who have a contribution record of at least 35 years, little or no additional (earnings-related) pension and have not contracted out.
• Individuals whose foundation amount is less than the single-tier pension. These are likely to be people who are too young to have a full contribution record or who have contracted out for significant periods. They will be able to increase their pension to the amount of the single-tier pension at a rate of £4.11 for each qualifying year before State Pension age.
• Those whose foundation amount exceeds the single-tier pension. They will receive the ‘excess’ as a top-up payment.
• Those who have no pre-implementation National Insurance record. They will qualify for the single-tier pension and other private pension initiatives.

The government believes that its boldness will be rewarded by over 80% of people qualifying for the full single-tier pension by the mid-2030s.
The key to the simplicity of the approach is that the foundation amount will be calculated after a deduction for contracting out on a pro rata basis rather than the claimant waiting until pension age for the deduction to be made.

State Pension age

The State Pension age is already in the process of change. It will have been equalised for men and women by November 2018 and will have increased for men and women to 66 by October 2020. Between 2026 and 2028 and dependent on an individual’s date of birth, State Pension age will have moved to 67, but the government has plans beyond that.

It proposes a five-year review with the first likely to take place in 2016 or 2017. An overriding principle of the review will be to maintain the proportion of retired life compared with working life. In determining length of retired life, the review will call on evidence from the Government Actuary’s Department. The review will also call on evidence from an independently led body that will consider wider matters such as variations and trends in life expectancy.

When the review leads to a recommendation, the government will give at least ten years’ notice of change.

The real objective

The proposals are relatively simple to understand and quite bold. However, there is a risk that those who congratulate the government on its efficiency at introducing the changes lose sight of the overall objective which is to provide a sustainable retirement for claimants and their dependants. Even if we avoid the temptation to make comparisons based on maximum benefits (which does not reflect reality for many), the State Pension is set to reduce and to be available later in life.

These proposals deal with difficult issues of transition and contracting out; the gauntlet has been thrown down and sustainable retirement will become increasingly dependent on private provision, of which automatic enrolment is only part of the solution.

If you would like to find out more about pensions, please get in touch.

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Investment income and growth

Investment income and growth

Interest rates have been frozen at a historic low for more than four years.

Conversely, inflation and taxes remain high. As a consequence it’s now very difficult to find a savings account that will earn sufficient returns to preserve the real purchasing power of your money. Yet if you explore your options carefully and take the right advice, you can take a positive step towards achieving inflation-beating income and growth.

We may have a new chief at the Bank of England, but the outlook for interest rates remains the same. Incoming governor Mark Carney has indicated that they could stay at their record lows for at least the next three years. This means money left on deposit will continue to be eaten away by inflation. That’s great for borrowers but dismal for savers and those seeking retirement income.

Interest rates have been at 0.5% since 2009, while inflation (measured by the Consumer Prices Index, July 2013) is running at 2.8%. Savings accounts must pay 3.5% or more to beat inflation for a basic rate taxpayer, or 4.66% for a higher rate taxpayer. Of the 804 accounts in the market today (including ISA accounts), only one beats tax and inflation, and that’s just for basic rate taxpayers and requires you to lock up your money for seven years. [Moneyfacts 13/8/13].

If you don’t protect your wealth, inflation will steal away a substantial part of it in real terms.

Finding the right returns for your income

If you are to beat inflation you will need to find the right returns and this means thinking about your attitude to risk. Bear in mind that, with cash now being eroded by inflation, there are no risk-free options. But there are different growth and income investment choices open to you depending on the level of risk you are prepared to take.

Bonds may offer positive income in real terms with a relatively low level of risk. Returns from government bonds, the safest, have recently been lower than inflation but others, including some corporate bonds, generally offer higher yields at levels of risk you may find acceptable.

Inflation can actually drive up the prices of some asset classes, like equities and property, helping to drive up their prices. The risk of holding equities is generally higher than owning bonds, but this may be offset by the potential for higher growth.

Diversification can help to reduce investment risk by spreading it around. However, the likelihood of the prices in different asset classes such as bonds, equities and property falling at the same time is lower than in a single asset class. You can diversify within a single asset class – for example, by spreading your equity investments across UK shares, US shares and emerging market shares.

The power of ‘pound cost averaging’

There are other ways to reduce risk. One way to avoid the risk of buying when the market is too high is by drip-feeding regular amounts of investment into the markets – some call it ‘pound cost averaging’. By investing small amounts in a stock every month, you could end up buying more shares at a lower average price than if you bought them all at once, although this of course cannot be guaranteed. And remember that some investment structures offer tax efficiencies that can boost your returns overall. Individual Savings Accounts (ISAs) are the best-known but there are various others.

Don’t delay find out more today

If you would like to find out more about how to invest for income in growth in these times of record low interest rates and inflation, please get in touch.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested. Equities do not provide the security of capital associated with a deposit account with a bank or building society. The levels and bases of taxation and reliefs from taxation can change at any time and are generally dependent on individual circumstances.

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Gifting surplus income

A prominent area of discussion with clients is Inheritance Tax planning, and although there are several plans available to mitigate one’s IHT liability depending on the individual client circumstances, it is essential to not miss the basic opportunities which are also available. A prime example of this is gifting from surplus income.

Gifting surplus income

It is generally well known that in order for a gift to be effective for Inheritance Tax (IHT) purposes, the donor needs to survive making the gift by seven years. This is true for gifts out of capital. What is less well known is that there is special exemption for gifts of surplus income. Such gifts can be exempt from IHT immediately; there is no need to survive seven years. This is the ‘normal expenditure out of income’ exemption which allows lifetime gifts of an unlimited amount to be made free of IHT provided they meet the qualifying criteria. It is arguably one of the most useful and underused of all IHT exemptions.

There are three criteria to be met for the ‘normal expenditure out of income’ exemption to be valid:

• The payments must be part of the donor’s normal expenditure

• The payments must be made out of income

• The payments must not adversely affect the donor’s standard of living.

Normal expenditure

The donor does not have to gift the same amount every year, or make gifts to the same person, but gifts need to be part of the donor’s normal expenditure, so should be made on a regular basis, establishing a pattern, whether that is monthly, six-monthly or annually. It may be possible to use income from earlier years (most likely only the last two years), provided such sums have not been invested.

Made out of income

For gifts to qualify, the donor must be able to show the payments have been made out of his/her surplus income, which can include earned income (net income after tax) and investment income (again after tax). However, it is not possible to make gifts out of income and then use capital to supplement living costs. An example of this would be gifts of surplus taxable income with a subsequent investment into a discounted gift plan from capital to replace income.

Not adversely affect the donor’s standard of living

It is important to show that making the gifts does not adversely affect the donor’s standard of living. Accordingly the donor’s ordinary living expenses – which would include items such as utility bills, mortgage repayments (if relevant), food, travel, leisure and holidays – should not be affected.


It is important that the donor retains evidence to support the claim which will be made by his/her personal representatives on death, there being no reporting on this to HM Revenue & Customs (HMRC) during one’s lifetime.

Reporting on death

The executors of the deceased’s estate will be required to make a claim that gifts should be treated as exempt by virtue of the normal expenditure out of income rule, on forms IHT400 and IHT403 (www.hmrc.gov.uk/inheritancetax/iht400.pdf and www.hmrc.gov.uk/inheritancetax/iht403.pdf).

The donor should keep an adequate record of all gifts, maintained on a regular basis.


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