“The worst thing that people do is think, ‘I must take my tax-free cash’,” says Moffat. “There’s no need to take it at 75 now, but still people kind of have that in their minds. And then it sits in a bank account; then it’s just sitting ripe.”
Meeting the exemption
So if a client is making gifts from their pension and wants to do so under ‘normal expenditure out of income’, what steps can be taken to ensure that they meet the exemption?
“Claiming the exemption can prove difficult,” Downie acknowledges. “Typically the exemption is only claimed after the client’s death; and it is often then down to the personal representatives to collate all the information required to show that the conditions of the exemption have been met, so that those gifts aren’t subject to IHT.
“Advisers can make this job much easier for the personal representatives by having detailed records of the client’s income and expenditure for the lesser of the period the gifts were made or the last seven years of gifting.
“The ‘IHT 403’ form could be used to record this information during the client's lifetime, even though it does not need to be submitted until after they have died.”
On the requirement for a gift not to cause a reduction in standard of living to meet the exemption, Moffat says this is based on the benefactor’s lifestyle.
“Perhaps if you’re a multi-millionaire and you spend £10mn a year, then if you went down to £500,000 a year because you’re giving everything away, then that’s not going to satisfy that test,” she says.
Chloe Cheung is a senior features writer at FTAdviser
