Cheyney Goulding

Cheyney Goulding Solicitors

t: 01483 56 76 76   e: legal@cheyneygoulding.co.uk

Wealth Management

A lesser known way to reduce your Inheritance Tax bill – Gifts out of Income

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Most forms of tax relief or exemption have an upper limit, such as the income tax personal allowance.  

However, Gifts out of income have no upper monetary limit and are exempt from IHT subject to certain conditions.

 What are “Gifts Out of Income” and how can they be used to lessen IHT? 

The normal expenditure out of income exemption applies to certain gifts, such as cash and, in some instances, chattels. The exemption is limited only to the extent of a testator’s surplus income.  It can be a very useful way to  reduce the size of your estate, and therefore lessen the amount of IHT paid by your loved ones.

There are qualifying conditions to be met. Amongst other things the gift must be made as part of the normal expenditure of the benefactor; the benefactor must retain sufficient income to maintain their standard of living; and gifts must be made from income.  

It is surprising that more people do not make use of it. 

The gift must be made as part of the normal expenditure of the testator 

HMRC’s interpretation is that gifts should form part of a regular pattern of payments. An exemption may be made available where there is evidence that the testator had made a commitment regarding any future expenditure. This needs to be documented so as to avoid problems for your personal representatives later.  

The testator must retain sufficient income to maintain their standard of living 

The amount of the surplus obviously varies all the time It is helpful to prepare an income and expenditure assessment, each year, to clarify the position. Any document that provides evidence of a gift, should also confirm that despite the gift (and any similar gifts made) the testator will have sufficient income to maintain their usual standard of living. 

Gifts must be made out of income  

The exemption can only apply when expenditure is from surplus net taxable income. This can include salary, dividends, pension or business profits. Income can be identified in the same year as gifts have been made, as it demonstrates that there is sufficient income available.  

However, income from earlier years is not seen as income indefinitely. There are no set rules about when accumulated income becomes capital. HMRC will normally consider this to be after two years. This can cause a problem where income has been accumulated. 

Record keeping 

A recommendation is that the testator writes a letter to their chosen beneficiary to record the gift. The result of this means that keeping a copy of the letter represents evidence of the testators’ intentions. Furthermore, financial records of gifts, such as bank statements, can help demonstrate that payments have been made. Additionally, documentary evidence that shows that such payments are gifts can be helpful, this can be a simple, signed ‘Gift Memorandum’ or even a letter to the intended recipient.  

Be careful!

However, always talk us before making any sizeable gift. There are potential problems that you need to be aware of, such as the possibility of the recipient’s relationship breaking down. This can lead to a substantial amount of your gift leaving the family, and disappearing with your ex in-law! We are able to offer solutions for this.

If you would like to know more about inheritance tax and the various tax-saving schemes, please do not hesitate to contact Christopher Seddon, who is the head of our Private Client Team for guidance and an initial free telephone consultation. 

Email: cseddon@cheyneygoulding.co.uk

Telephone: 01483 796008

Contesting a Will on the grounds of ‘knowledge and approval’

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What is meant by ‘knowledge and approval’ when contesting the validity of a will?

For a will to be valid, the person making the Will (“the Testator”), in addition to having capacity, must have understood and approvedits contents. 


What happens if suspicious circumstances surround the preparation or execution of a will?

If circumstances surrounding execution of the will are ‘suspicious, is down to those who believe the will to be valid to provide evidence countering the ‘suspicions’ and prove the testator did have knowledge of the terms of their will and approved its content.

The approach of the courts, in these cases, is to consider whether there was a clear understanding of:

  1. What was in the will when it was signed; and
  2. What its effect would be.

For example, if the testator suffers from severe mental illness, they may be unable to comprehend the will they are executing.

Perhaps a person did not seek professional advice and has left minimal or no provision for their children.  Instead they give considerable benefit to others who are not reliant on them in any way.  These ‘suspicious’ circumstances may lead to assumptions that there was neither the necessary knowledge of the will, nor approval of its contents.

Some potentially ‘suspicious’ circumstances include:

  • The will is home-made, and no professional advice has been sought.
  • The will contains spelling mistakes and/or uses language which would not have been used or understood by the testator.
  • The will contains untrue statements and/or features which are uncharacteristic for the testator.
  • The will contains a radical change to previous legacies/long-standing wishes made without a rational explanation and/or generally the legacies cannot be rationally explained.
  • The relationship of the beneficiary to the testator was not close.
  • The witnesses to the will were not sufficiently independent.
  • There is evidence the beneficiary acted dishonestly, suspiciously or against the interests of the testator and/or having played a central role in the making of the will.
  • The person who made the will is elderly and the will is in favour of people who are not very close to them or in a position of power over that person.
  • The testator’s wishes were given in response to leading questions.
  • There is evidence generally of the testator’s mind failing, but they retained some testamentary capacity.

Finally, there are a few other areas of mindful consideration.

Although where a will has been executed correctly, there is a general presumption that the testator has the required ‘knowledge and approval’ of the terms of the will, this may not be the case where that person:

  • is deaf and/or unable to speak;
  • cannot write or are paralysed;
  • is blind or illiterate; or
  • directed another person to sign the will on their behalf.

In these circumstances, the person relying on the validity of the will has to prove that the testator had knowledge of the will and approved its terms.  This must be supported by evidence.

If you have any concerns regarding the validity of a Will or if you have concerns regarding the preparation and execution of a Will, please contact Christopher Seddon, who is the head of our Private Client Team, for guidance and an initial free telephone consultation.

Email: cseddon@cheyneygoulding.co.uk

Telephone: 01483 796008