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Impact of getting rid of normal expenditure out of income scheme under inheritance tax

ended 23. October 2024

A journalist on the iPaper is looking for Information on impact of getting rid of normal expenditure out of income scheme under inheritance tax.

Could this be removed in the Budget and what would be the implications? How much would it save the Government?

3 responses from the Newspage community

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Anita Wright
Independent Financial Adviser at Bolton James
There have been ongoing discussions about potential changes to IHT rules, with the Normal Expenditure Out of Income exemption often highlighted as a loophole used by wealthier individuals. Removing it could result in higher tax bills for families. Without this exemption, regular gifts made from surplus income would count toward the estate and be subject to IHT at 40%. For individuals who live a long time and make substantial gifts, this could significantly increase the size of their taxable estate. Many people with high levels of investment income use this exemption to reduce their estate without depleting their capital. Removing it would limit their ability to manage their estate size effectively, forcing more people to rely on the seven-year rule for larger gifts. While the removal of this exemption could generate a small but notable increase in government revenues, it is difficult to calculate precise savings without concrete data on how widely the exemption is used.
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Philip Dragoumis
Director and Owner at Thera Wealth Management
This relief is an important one and widely used in estate planning for wealthier families with high disposable incomes . The key benefit is that unlike an outright gift which is only potentially exempt and subject to the 7 year rule, regular giving out of income falls out of the estate for IHT purposes straightaway. Also the only limit to the gift is the size of the donor's income. The total take for the government from IHT on the back of this measure could increase substantially.
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Mark Scott
Director and IFA at Positive Advisers Ltd
Many grandparents help children and grandchildren with regular gifts. They assist their children and grandchildren by traditionally providing regular gifts for child care and education costs. It is now equally common to see regular gifts given to help children and grandchildren survive with the cost of living.

Removing the gifts from the expenditure rule would hit those hardest who hold their wealth in illiquid assets such as property. Those with cash and liquid assets will be able to continue gifting lump sums or gifting into trusts to release income over time.

Families in expensive property areas in the South will suffer the most. Maybe more of these will use equity release to gift capital to start the clock rolling on a potentially exempt transfer over whatever term Rachel changes that, too!