The tax break for admin nerds

The approach to 31st January is one of the busiest times of year for financial planners. As people start to suffer the pain of handing over large sums to the taxman, they naturally start to wonder how they can pay less tax in the future. Sadly, there is very little you can do now to reduce the amount you will have to pay at the end of the month (though you can still reduce your tax bill by giving money to charity).

If, like me, you like nothing more than an expenditure spreadsheet (I like them so much, I even enjoy looking at other people’s!), then you’ll be pleased to know that there is a tax break for being good at your annual expenditure admin.

One of the least used exemptions for inheritance tax is the “regular gifts out of excess expenditure” exemption. It doesn’t sound very exciting and it does need you to do some admin. But it can give your family quite a nice tax saving (usually 40% of the amount you give away). If you don’t like filling in spreadsheets, think of it as a reward for doing so.

The exemption requires you to show, firstly, that your income exceeds your expenditure. Most types of income can be included in the calculation – not just your taxable income. So, the income can include interest and dividend income from investments you hold in ISAs (even if that income is automatically reinvested in an accumulation version of a fund). However, it doesn’t include regular withdrawals from investments (e.g. if you withdraw a fixed amount from an ISA).

HMRC helpfully gives us a list of the categories of expenditure it expects you to keep details of, namely:

  • Insurance
  • Household Bills
  • Council Tax
  • Travelling Costs
  • Entertainment
  • Holidays
  • Mortgages (only the interest can be included)

They also have an “other” category to which other costs should be assigned (so you can’t ignore other costs, sadly!).

So, if your income, as defined by HMRC, exceeds your expenditure, and you commit to giving away some, or all, of the excess over expenditure every year, the gift of that excess is free from inheritance tax, regardless of when you die. This is an extra exemption to the usual £3,000 per year which you can give away, free from inheritance tax, and it is in addition to the other exemptions.

It’s important to remember that you don’t have to give away the same amount every year, or even the same proportion of the excess. You just have to commit to making a regular gift. There is no limit on the amount of the exemption.

It all sounds like it should be pretty easy to do. So, you’d imagine that everybody who has an excess of income over expenditure would be taking full advantage of this exemption.

But the problem is that, following your death, HMRC needs your executors to give them the information to prove that you have had an excess of income over expenditure, for up to 7 tax years before you died. If you haven’t kept records, that’s an impossible job for your executors. And that’s the most likely reason why so few people claim this exemption.

But, if you keep a record of your annual expenditure and income (and commit to a regular gift), it becomes pretty straightforward for your executors to claim this valuable tax break.

Of course, if you don’t like expenditure spreadsheets (Louise tells me that there are people out there who don’t love them like I do!), you can get someone to complete them for you. Keeping a record of your expenditure is one of the most useful things you can do when planning your future spending, and we retirement planners enjoy this sort of thing.

If you feel that you could take advantage of this inheritance tax break, and would like our help making sure that you do, please contact us.

Philip Wise | philip@sussexretirement.co.uk

Managing Director and Chartered Financial Planner


This guide is for information purposes and does not constitute financial advice, which should be based on your individual circumstances.
The Financial Conduct Authority does not regulate some aspects of Trust, Tax and Estate Planning.

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