Normal Expenditure out of Income Plan
What is it?
The Normal Expenditure out of Income Plan takes advantage of an exemption from inheritance tax (IHT) known as Normal Expenditure out of Income in order to reduce the IHT payable ultimately on your estate.
The Plan provides you with all the necessary documents and advice to take full advantage of this valuable exemption.
Who is it for?
This Plan is suitable for anyone who has excess income over and above their maintenance needs and who wishes to reduce the IHT payable on their estate.
How does it work?
IHT is payable on the value of all assets in an estate exceeding
£325,000 at the rate of 40%. Married couples and couples in registered civil partnerships can transfer any unused
allowance between them and there are a number of reliefs and exemptions from IHT.
This Plan takes advantage of an exemption which allows gifts to be made from income, and for those gifts to be IHT free however large they are and however long the donor survives them.
To qualify for this exemption the gifts must be from taxed income, made on a regular basis and the person making the gift must retain sufficient income to maintain his or her normal standard of living without recourse to capital.
The Plan enables the use of this exemption and ensures compliance with all HMRC requirements. It also incorporates flexibility over who should receive the gifts, and the timing of their benefits, by the use of a pilot trust which receives the gifts over a period of years.
What are the tax savings?
The tax savings vary depending on each individual’s circumstances but the earlier the Plan is started the greater they are likely to be.
Case study
Take the example of Stephen who took early retirement following the successful flotation of his business. Stephen retains a large shareholding and receives dividend and pension income substantially in excess of that required to maintain his normal standard of living now that he no longer has to pay school fees or mortgage repayments.
Stephen would like to reduce his IHT liability and also to make some provision for his six very young grandchildren. Stephen uses the Plan and begins making a series of annual gifts to a discretionary trust for the benefit of his grandchildren set up for him under the Plan.
The amount put into the trust varies each year depending on Stephen’s income and outgoings. The amount of the gifts are calculated each year by Stephen’s financial adviser using the spreadsheet, based on HMRC requirements, which is provided as part of the Plan. Stephen completes the letter to the trustees also included in the Plan which makes it clear that he intends to make the gifts on a regular basis.
After ten years, the trust has accumulated assets of £300,000, which the trustees can use for the grandchildren’s benefit at their discretion, and Stephen’s IHT liability has reduced by a total of £120,000 on current rates.
At this point Stephen’s initial trust is nearing the limit of the IHT nil rate band of £325,000 which, if breached, will mean that IHT charges at a maximum rate of 6% will become payable on capital distributions from the trust and on each ten yearly
anniversary of the trust’s creation. To avoid this, another trust is created into which Stephen makes future gifts under the Plan.
What will we provide you with?
This Plan consists of:
- expert advice on the operation of the exemption;
- a pilot trust or series of trusts to receive the gifts;
- a pro-forma letter providing evidence as to the regular nature of the gifts; and
- a spreadsheet tool for calculating the amount of the surplus income available from which the gifts can be made.
The cost
£1300 plus VAT.