There is an exemption for inheritance tax purposes, in addition to the £3,000 annual allowance, for gifts made out of income on a regular basis.

It is important to establish the regularity of the payments in order to qualify for this relief, so if gifts are made in cash then these should be regular in amount and frequency taking one year with another.

A better way of establishing regular payments may be to take out an investment policy for someone such as your (adult) child with premiums being due on a regular basis.

Example:

John is 60 and earns £200,000 per year.

He has a son who is 25, who cannot work at present due to ill health.

John, who does not need the majority of his income, wishes to gift his son £50,000 per year, but is worried about the effects this will have on his inheritance tax bill should he not survive the seven years necessary for these monies to drop out of his estate.

He establishes a quarterly standing order into his son’s account, and writes a letter to his son stating that he intends to gift this amount per annum for as long as he continues to work.

He continues to make the payments until his death in an accident five years later. As he clearly established the regularity of the payments before his death, the amounts paid to his son are removed from his estate and a substantial tax saving has been achieved.