Inheritance tax gift exemptions
Discussion
A little surprised yesterday as the solicitor who we've instructed to deal with my mum's estate has sent through his rough calculation on IHT based on a list of gifts that we provided, but after I questioned a couple of figures, he started even questioning himself!
So apart from seeking another solicitor to double check the calcs, can any trusted PHer confirm?
- The 3k annual exemption (if unused) can be passed onto the following year, but are gifts in a specific year taken from that years allowance first, and only once the 3k for that year has been used, does it look backwards 1yr to check if there is any unused from the previous year? The government website states "Leftover annual exemption can be carried over from each tax year to the next, but the maximum exemption is £6,000" But this is surely a bit unclear?
Example:
Year 1: 3k allowance, No gifts. No taxable
Year 2: 6k allowance, 4k gifts, No taxable
Year 3: What is the allowance?
A: 5k? (3k from year 3, and 2k from year 2)
or
B: 3k? (as you used all of year 2's specific 3k allowance?)
Also
- There is some notes here https://www.gov.uk/inheritance-tax/gifts relating to "Regular Gifts from the giver's income:
"There’s no Inheritance Tax on gifts from the deceased’s income (after they paid tax) as long as the deceased had enough money to maintain their normal lifestyle. The gifts include: Christmas, birthday and wedding or civil partnership anniversary presents"
How does this work in reality? My parents lived mortgage free for quite a while, and certainly they're overall income was higher than expenditure even after my dad retired, so it would seem that most gifts that were given would technically just have reduced their income, rather than diminished any savings.
However, at present we are only just over the tax free threshold anyway so I don't want to go down what looks like a long and complicated path in order to reduce the tax bill to zero, if it'll just drag out the entire process?
Anyone have experience of dealing with IHT from regular income? Are there any rules/guidance as to what specifically is exempt?
Thanks in advance!
MrChips
So apart from seeking another solicitor to double check the calcs, can any trusted PHer confirm?
- The 3k annual exemption (if unused) can be passed onto the following year, but are gifts in a specific year taken from that years allowance first, and only once the 3k for that year has been used, does it look backwards 1yr to check if there is any unused from the previous year? The government website states "Leftover annual exemption can be carried over from each tax year to the next, but the maximum exemption is £6,000" But this is surely a bit unclear?
Example:
Year 1: 3k allowance, No gifts. No taxable
Year 2: 6k allowance, 4k gifts, No taxable
Year 3: What is the allowance?
A: 5k? (3k from year 3, and 2k from year 2)
or
B: 3k? (as you used all of year 2's specific 3k allowance?)
Also
- There is some notes here https://www.gov.uk/inheritance-tax/gifts relating to "Regular Gifts from the giver's income:
"There’s no Inheritance Tax on gifts from the deceased’s income (after they paid tax) as long as the deceased had enough money to maintain their normal lifestyle. The gifts include: Christmas, birthday and wedding or civil partnership anniversary presents"
How does this work in reality? My parents lived mortgage free for quite a while, and certainly they're overall income was higher than expenditure even after my dad retired, so it would seem that most gifts that were given would technically just have reduced their income, rather than diminished any savings.
However, at present we are only just over the tax free threshold anyway so I don't want to go down what looks like a long and complicated path in order to reduce the tax bill to zero, if it'll just drag out the entire process?
Anyone have experience of dealing with IHT from regular income? Are there any rules/guidance as to what specifically is exempt?
Thanks in advance!
MrChips
Its A = £5k.
Gifts out of income is often overlooked when a solicitor is given a list of bequests - if your parents lifestyle could be fully maintained and their savings capital maintained then I would apply the exemption to those gifts so they don't even count when reviewing the use of the Annual Exemption.
David
Gifts out of income is often overlooked when a solicitor is given a list of bequests - if your parents lifestyle could be fully maintained and their savings capital maintained then I would apply the exemption to those gifts so they don't even count when reviewing the use of the Annual Exemption.
David
Finally managed to get through to the HM revenue helpline, and their answer was B) 3k. Hmmm. 
Why can't they just have some worked examples to show you!
Good point on the income allowance side of things, and potentially good for us as my parents lived mortgage free. Our solicitor hasn't even mentioned it but the chat with the helpline today seems to suggest it might not be that much more work to complete the extra section of the forms if it does benefit us.
So far not impressed with our solicitor as I thought the whole point of paying someone was to ensure that you're getting the right advice and options as they should be experienced with it!
Why can't they just have some worked examples to show you!
Good point on the income allowance side of things, and potentially good for us as my parents lived mortgage free. Our solicitor hasn't even mentioned it but the chat with the helpline today seems to suggest it might not be that much more work to complete the extra section of the forms if it does benefit us.
So far not impressed with our solicitor as I thought the whole point of paying someone was to ensure that you're getting the right advice and options as they should be experienced with it!
HMRC are correct in your example, £3k, as you would fully use that years allowance, before anything unused from the previous years'.
And sorry, but the income rule is not as per the previous poster implies. The key to them is they need to be regular and from income, one off lump sums will not attract the relief. You would need to show intent for a regular pay,net to qualify.
And sorry, but the income rule is not as per the previous poster implies. The key to them is they need to be regular and from income, one off lump sums will not attract the relief. You would need to show intent for a regular pay,net to qualify.
Edited by ellroy on Wednesday 6th May 19:21
ellroy said:
HMRC are correct in your example, £3k, as you would fully use that years allowance, before anything unused from the previous years'.
And sorry, but the income rule is not as per the previous poster implies. The key to them is they need to be regular and from income, one off lump sums will not attract the relief. You would need to show intent for a regular pay,net to qualify.
Sorry you are incorrect - nothing to stop lumps being made so long as the money is coming from income eg earnings are £5k a month and they spend £3k on themselves and every 6 months gift away £12k (which you would say is wrong but gives the same result as £2k per month!).And sorry, but the income rule is not as per the previous poster implies. The key to them is they need to be regular and from income, one off lump sums will not attract the relief. You would need to show intent for a regular pay,net to qualify.
Edited by ellroy on Wednesday 6th May 19:21
Re the rolled-over allowance, you are correct as can be seen from this extract from HMRC manuals:
IHTM14144 - Lifetime transfers: annual exemption: roll over provisions
Any part of the annual exemption which is not used in the tax year is carried forward (rolled-over) into the next tax year. It can only be carried forward to the next year and cannot be used in any later years. The annual exemption should be applied in the following order
-use the annual exemption for the current year first
-then use any part of the previous year's annual exemption not used in that year
-you cannot use any surplus annual exemption from any earlier year.
David
Edited by sumo69 on Wednesday 6th May 19:54
https://www.gov.uk/inheritance-tax/gifts
Sorry, but I'm correct, the key word being regular.
Lump sums can be made, but must be regular in order to comply with the legislation.
Sorry, but I'm correct, the key word being regular.
Lump sums can be made, but must be regular in order to comply with the legislation.
I guess it does also say that includes birthdays, or christmas, and I wouldn't have normally put those into the "regular" category.
Looking at our figures, I doubt any of the gifts can be considered regular enough, and as we're not facing a massive bill anyway, it seems a bit unnecessary to do all the work to trawl through their account with enough detail to show that it was from income. I've also seen that annuity income is potentially not counted as income, which would stop our claim anyway. We're paying the solicitor for their time, so any work/input we ask them to do also has a cost attached to it so I guess we'll need to way this up against the potential reduction in tax.
Thanks Sumo for the confirmation from the guidance notes
. Despite an hr of searching I hadn't been able to find it, even though I knew it must exist! Bit disappointed the solicitor wasn't able to confirm this straight away!
Looking at our figures, I doubt any of the gifts can be considered regular enough, and as we're not facing a massive bill anyway, it seems a bit unnecessary to do all the work to trawl through their account with enough detail to show that it was from income. I've also seen that annuity income is potentially not counted as income, which would stop our claim anyway. We're paying the solicitor for their time, so any work/input we ask them to do also has a cost attached to it so I guess we'll need to way this up against the potential reduction in tax.
Thanks Sumo for the confirmation from the guidance notes
. Despite an hr of searching I hadn't been able to find it, even though I knew it must exist! Bit disappointed the solicitor wasn't able to confirm this straight away!ellroy said:
https://www.gov.uk/inheritance-tax/gifts
Sorry, but I'm correct, the key word being regular.
Lump sums can be made, but must be regular in order to comply with the legislation.
The legislation does not use the word regular. Case law brings in the regular requirement Bennett v IRC. Sorry, but I'm correct, the key word being regular.
Lump sums can be made, but must be regular in order to comply with the legislation.
The relevant section of IHTA is as follows;
Normal expenditure out of income.
(1)A transfer of value is an exempt transfer if, or to the extent that, it is shown—
(a)that it was made as part of the normal expenditure of the transferor, and
(b)that (taking one year with another) it was made out of his income, and
(c)that, after allowing for all transfers of value forming part of his normal expenditure, the transferor was left with sufficient income to maintain his usual standard of living.
Normal expenditure was tested in the Bennett case and for expenditure to be “normal” the taxpayer must show a settled pattern evidenced either by sequence of past payments, or proof of a prior commitment by regarding his future expenditure.
That's interesting - my FIL gives us (and his 2 sons) and few grand every Christmas. We just pass it on to our kids, but it did concern me that it might be a problem when he pops his clogs - however it's just about covered by his surplus income (he gets a couple of £K more per month than he needs) so maybe it'll be OK.
We've come across one final stumbling block before we submit our returns so thought I'd see if anyone sees this differently.
My mum paid for some of the wedding suppliers and venue costs for our wedding, as well as giving us a gift on the big day.
We've declared all our accounts to the solicitor but they believe we may need to also count the money that mum paid for the event itself.
My view is that this is a grey area, in that the money she spent was also for her benefit (she wanted to have a big wedding and helped chose the venue because she could afford it).
The hmrc helpline was useless and only kept repeating about the wedding gift allowance which we've used already to cover the cash gift she gave us on the day.
If we take out the word "wedding" and said for the sake of argument that this was a large birthday party that mum had paid for, then it wouldn't even have been on our radar to declare, as it's just payment for an event/service.
Any thoughts? Is this really all needing to be declared as a gift?
Our solicitor is going to look for any previous cases but he doesn't remember any but that seems strange as it can't be that rare for a parent to pay for an event?!
My mum paid for some of the wedding suppliers and venue costs for our wedding, as well as giving us a gift on the big day.
We've declared all our accounts to the solicitor but they believe we may need to also count the money that mum paid for the event itself.
My view is that this is a grey area, in that the money she spent was also for her benefit (she wanted to have a big wedding and helped chose the venue because she could afford it).
The hmrc helpline was useless and only kept repeating about the wedding gift allowance which we've used already to cover the cash gift she gave us on the day.
If we take out the word "wedding" and said for the sake of argument that this was a large birthday party that mum had paid for, then it wouldn't even have been on our radar to declare, as it's just payment for an event/service.
Any thoughts? Is this really all needing to be declared as a gift?
Our solicitor is going to look for any previous cases but he doesn't remember any but that seems strange as it can't be that rare for a parent to pay for an event?!
So im also caught up ith the 3k annual rollover question. According to http://www.hmrc.gov.uk/manuals/ihtmanual/ihtm14144... it states:
IHTM14144 - Lifetime transfers: annual exemption: roll over provisions
Any part of the annual exemption which is not used in the tax year is carried forward (rolled-over) into the next tax year. It can only be carried forward to the next year and cannot be used in any later years. The annual exemption should be applied in the following order
use the annual exemption for the current year first
then use any part of the previous year's annual exemption not used in that year
you cannot use any surplus annual exemption from any earlier year.
So that's hmrc's view. If. Look at the actual legislation http://www.legislation.gov.uk/ukpga/1984/51/sectio...
It says
Annual exemption.
(1)Transfers of value made by a transferor in any one year are exempt to the extent that the values transferred by them (calculated as values on which no tax is chargeable) do not exceed £3,000.
(2)Where those values fall short of £3,000, the amount by which they fall short shall, in relation to the next following year, be added to the £3,000 mentioned in subsection (1) above
Is this another case of HMRC presenting opinion as law, or am I missing something?
IHTM14144 - Lifetime transfers: annual exemption: roll over provisions
Any part of the annual exemption which is not used in the tax year is carried forward (rolled-over) into the next tax year. It can only be carried forward to the next year and cannot be used in any later years. The annual exemption should be applied in the following order
use the annual exemption for the current year first
then use any part of the previous year's annual exemption not used in that year
you cannot use any surplus annual exemption from any earlier year.
So that's hmrc's view. If. Look at the actual legislation http://www.legislation.gov.uk/ukpga/1984/51/sectio...
It says
Annual exemption.
(1)Transfers of value made by a transferor in any one year are exempt to the extent that the values transferred by them (calculated as values on which no tax is chargeable) do not exceed £3,000.
(2)Where those values fall short of £3,000, the amount by which they fall short shall, in relation to the next following year, be added to the £3,000 mentioned in subsection (1) above
Is this another case of HMRC presenting opinion as law, or am I missing something?
contractor said:
Is this another case of HMRC presenting opinion as law, or am I missing something?
It's straightforward really,1. In any year you have an allowance of £3k
2. If you give away more than £3k in the year and haven't used last year's allowance you can use last year's allowance as well.
As regards gifts out of income it's best for these to be paid regularly. For instance, "helping out" with the expenses of a child's family by transferring across, say, £500 of surplus income each month. Every 3, 6 or 12 months should be OK but as soon as you roll-over from one year to the next the exemption may be lost. Remember, if HMRC start asking difficult questions you need to able to fully justify your position. Check out the link - which shows why IMO monthly is the safest bet. By the way, it's not a gift out of income if you give away your income and then resort to spending capital to make up the shortfall....
http://www.hmrc.gov.uk/manuals/ihtmanual/ihtm14255...
sambucket said:
Does it count as a gift if the deceased paid the medical bills of his child, as in paid the invoice direct?
"Yes and no."Oooh splendid, thanks, can you be a bit more helpful?
- If the parent had to sell their life-savings investments to pay the bill it's an IHT gift.
- If the parent was able to pay the bill out of their routine cash flow it's arguably "normal expenditure out of income" and not an IHT gift. However, it would be better if the parent had a track record of financially assisting the child so that the payment isn't just "out of income" but also demonstrably "normal".
I've never had to do this but would like to understand it so that I can be ready when my mum pops her clogs, it's likely to happen within the next 10 years.
Do you have to provide a list of all "gifts" passed onto you within the last 7 years? and a statement of the deceased capital/income etc.?
How far looking into accounts do they go? If you forget something would it be noticed?
Do you have to provide a list of all "gifts" passed onto you within the last 7 years? and a statement of the deceased capital/income etc.?
How far looking into accounts do they go? If you forget something would it be noticed?
EddyP said:
I've never had to do this but would like to understand it so that I can be ready when my mum pops her clogs, it's likely to happen within the next 10 years.
Do you have to provide a list of all "gifts" passed onto you within the last 7 years? and a statement of the deceased capital/income etc.?
How far looking into accounts do they go? If you forget something would it be noticed?
Essentiallly it's "self-declaration" by the executors.Do you have to provide a list of all "gifts" passed onto you within the last 7 years? and a statement of the deceased capital/income etc.?
How far looking into accounts do they go? If you forget something would it be noticed?
Fine, so what does that mean in practical terms?
If there are no other reliable records it means getting hold of 7 years bank statements (easy - ask the bank) and looking for significant lumps going out that obviously aren't that month's bill at Sainsburys or Barclaycard.
Why?
Because if Mr HMRC feels like it it he can look at exactly those same records and give the executors a right kicking if they have missed something short.
Does that matter?
Yes, because if the executors have screwed up it's their personal liability. They don't have an automatic right to recover from Will beneficiaries who received the cash. And if the cash has been spent Mr Executor is up the chuff however well-meaning the beneficiaries may be...
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