Income Tax question
Discussion
I had an interesting conversation with a guy at one of my client's about how he can afford his lovely new 335d!
He mentioned that he has an "income" from his parents, not a trust fund, but a regular payment that they make to him, of £650 a month, that he gets in return for help his brother had with buying his house abroad, (brother lives abroad).
His parents are retired, and have looked into the Inheritance tax implications and are reportedly covered, as the payment is made out of their "income" (pensions etc) not from capital or savings, (so the 7 year rule apparently does not apply-they can spend their income as they see fit, and infact are apparently saving many £000's a month away on top also!!!).
So I have heard of this sort of thing, and understand it is ok from Inheritance tax issues, BUT should he be paying income tax on it? I was not sure if the £3000 per year gift (which is allowed per Inh Tax rules) and the amounts for weddings etc is applicable here.
On the one hand, it is income he gets outside his enmployment, however, his parents, as tax payers, have already paid tax on that income, (UK based pensions), so can HMRC chase him for income tax? It sounds a bit well,wrong, but then if they bought him a car, surely the only thing they would have to worry about is the Inheritence tax issues, which appeared covered in this case?
If income tax is payable by him, where does the line get drawn? If they paid off his credit card for example?
Anyone know! I told him yesterday he'd end up like "Arry Redknapp" but of course that would mean he'll get off now and be England manager by Friday!!!!
He mentioned that he has an "income" from his parents, not a trust fund, but a regular payment that they make to him, of £650 a month, that he gets in return for help his brother had with buying his house abroad, (brother lives abroad).
His parents are retired, and have looked into the Inheritance tax implications and are reportedly covered, as the payment is made out of their "income" (pensions etc) not from capital or savings, (so the 7 year rule apparently does not apply-they can spend their income as they see fit, and infact are apparently saving many £000's a month away on top also!!!).
So I have heard of this sort of thing, and understand it is ok from Inheritance tax issues, BUT should he be paying income tax on it? I was not sure if the £3000 per year gift (which is allowed per Inh Tax rules) and the amounts for weddings etc is applicable here.
On the one hand, it is income he gets outside his enmployment, however, his parents, as tax payers, have already paid tax on that income, (UK based pensions), so can HMRC chase him for income tax? It sounds a bit well,wrong, but then if they bought him a car, surely the only thing they would have to worry about is the Inheritence tax issues, which appeared covered in this case?
If income tax is payable by him, where does the line get drawn? If they paid off his credit card for example?
Anyone know! I told him yesterday he'd end up like "Arry Redknapp" but of course that would mean he'll get off now and be England manager by Friday!!!!
Edited by s3fella on Wednesday 8th February 13:05
Eric Mc said:
Is it a gift from his parents?
Well I suppose so, in as mcuh as he doesnt have to give it back! But it is a regular ammount each month. His brother had a lump sum to help by his home abroad and they are paying him the same amount but in monthly installments. From how much he mentioned, it will be several years before he's received the same. I can see why it would not be taxable, (it has already been taxed and it is not from capital), he's spending it, not saving it, (and if he did save ti he would pay tax on his savings), but it just felt to me that it was not quite right in some way!!
Eric Mc said:
People can give away what they like - as long as the gift is a genuine gift with no strings attached.
...and as long as the giver doesn't die within 7 years. Although I've always wondered who would know, it wouldn't be much trouble to hide it.The OP's question is bizzare though - many kids get an allowance from their rich parents.
moparmick said:
Eric
What if the gift is cash and you are self employed, how can you prove it was a giftand what is the limit.
Mick
What has being self employed got to do with things. What if the gift is cash and you are self employed, how can you prove it was a giftand what is the limit.
Mick
If an INDIVIDUAL gives a gift to another INDIVIDUAL - then there are no issues.
The fact that the individual giving the gift is self employed has no bearing on the matter whatsoever.
I suppose it is exactly that, an allowance. But this guy is like nearly 40!
It's not a family business he works for, this is genuinely extra money he gets nothing to do with his work.
Just seemed odd that to be as well of without it, he'd need to have about £14k payrise.
He's a nice chap, but a lucky bugger!!
It's not a family business he works for, this is genuinely extra money he gets nothing to do with his work.
Just seemed odd that to be as well of without it, he'd need to have about £14k payrise.
He's a nice chap, but a lucky bugger!!
Deva Link said:
...and as long as the giver doesn't die within 7 years. Although I've always wondered who would know, it wouldn't be much trouble to hide it.
The OP's question is bizzare though - many kids get an allowance from their rich parents.
The basic position is that any gifts that you make need to be survived by seven years for IHT purposes. There is however, ONE exception. Any regular gifts made out of surplus income do not need to be survived by seven years and fall outside of your estate on the date the gift is made. So a person with regular surplus investment income, could gift that surplus net of tax income on a regular, which does not have to survive the 7 years rule, thereby outside of the estate for IHT.The OP's question is bizzare though - many kids get an allowance from their rich parents.
Wings said:
The basic position is that any gifts that you make need to be survived by seven years for IHT purposes. There is however, ONE exception. Any regular gifts made out of surplus income do not need to be survived by seven years and fall outside of your estate on the date the gift is made. So a person with regular surplus investment income, could gift that surplus net of tax income on a regular basis, which does not have to survive the 7 years rule, thereby outside of the estate for IHT purposes.
Wings said:
The basic position is that any gifts that you make need to be survived by seven years for IHT purposes. There is however, ONE exception. Any regular gifts made out of surplus income do not need to be survived by seven years and fall outside of your estate on the date the gift is made. So a person with regular surplus investment income, could gift that surplus net of tax income on a regular, which does not have to survive the 7 years rule, thereby outside of the estate for IHT.
Yes, the OP explains that in his OP. It's not the only exemption - he touches on the other exemptions too. My post was adding to Eric's comment.Deva Link said:
Yes, the OP explains that in his OP. It's not the only exemption - he touches on the other exemptions too. My post was adding to Eric's comment.
Sorry Deva Link, i repeated because this type of regular gift is an important part of IHT planning, the same that is not widely known.Edited by Deva Link on Wednesday 8th February 21:06
Wings said:
So a person with regular surplus investment income, could gift that surplus net of tax income on a regular, which does not have to survive the 7 years rule, thereby outside of the estate for IHT.
Some additional clarification needed here. There are some aspects of this that need care. You mention investment income and it is important to watch how that is derived. For example, investment income often includes withdrawals from Investment Bonds, and is regularly considered in the same light as pension income, interest/dividend income etc. This income is not really income at all (despite it often being paid out with income like regularity), but capital and as long as the amount withdrawn is within prescribed limits does not attract any immediate taxation.What you cannot do is then ask for this to be treated under the gifts from surplus income exemption. That would be having your cake and eating it.
So, gifts from investment income yes, but if part of your investment portfolio comprises Investment Bonds, take care in respect of any income from that.
The other caveat is to ensure the gifting of income does not demean standard of living, it really does need to be surplus income once all usual living/lifestyle expenses have been met.
TFP said:
Some additional clarification needed here. There are some aspects of this that need care. You mention investment income and it is important to watch how that is derived. For example, investment income often includes withdrawals from Investment Bonds, and is regularly considered in the same light as pension income, interest/dividend income etc. This income is not really income at all (despite it often being paid out with income like regularity), but capital and as long as the amount withdrawn is within prescribed limits does not attract any immediate taxation.
What you cannot do is then ask for this to be treated under the gifts from surplus income exemption. That would be having your cake and eating it.
So, gifts from investment income yes, but if part of your investment portfolio comprises Investment Bonds, take care in respect of any income from that.
The other caveat is to ensure the gifting of income does not demean standard of living, it really does need to be surplus income once all usual living/lifestyle expenses have been met.
The advice i posted was given to me in the following contents;What you cannot do is then ask for this to be treated under the gifts from surplus income exemption. That would be having your cake and eating it.
So, gifts from investment income yes, but if part of your investment portfolio comprises Investment Bonds, take care in respect of any income from that.
The other caveat is to ensure the gifting of income does not demean standard of living, it really does need to be surplus income once all usual living/lifestyle expenses have been met.
"Although we did not discuss this at our meeting it is strategy that you may wish to consider.
The basic position is that any gifts that you make need to be survived by seven years for IHT purposes. There is however, one exception. Any regular gifts made out of surplus income do not need to be survived by seven years and fall outside of your estate on the date the gift is made.
I presume that most of the properties which you own are rented out and are producing an income? On the assumption that this is the case and that you are not using all of the income you are effectively increasing you IHT liability by accumulating income which will then be capitalised and subject to tax.
You may, therefore, wish to consider giving away this excess income."
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