IHT regular gifts from Income: how to calculate maximum

dxt_2

I want to start making regular gifts out of surplus income without changing my standard of living in order to reduce the eventual IHT liability of my estate.

I am in the process of calculating of how much I can give and will keep this with my financial records.

Calculating my expenses is detailed but not difficult.

The best record I have of my income is my HMRC self-assessment tax demand. It shows my income coming from a)pensions b)savings interest and c)investment dividends. My pensions income on its own exceeds my day-to-day (and annual) needs. My cash savings are normally in fixed term bonds where the interest shows on tax vouchers but may not in fact be available in the same year. The investment income may come either from OEIC income units where dividends are reinvested in new units, or from accumulation units where there is a tax credit but the income is incorporated in the unit price - in both cases the income, as with the savings interest, although showing on my tax calculation, was not available to me as actual cash.

However since my total income is undeniably the sum of my taxed income as shown on my tax assessment, it seems reasonable to me that the maximum gift I could give would be my post-tax annual income less my reasonable annual household expenses. I therefore propose to take my annualised living expenses from my total post-tax income and gift the remaining 'excess' income in equal monthly amounts to my son. (I will recalculate and document annually since the income is bound to change according to interest rate/dividend changes.)

Question 1: If properly documented, does this sound a correct understanding of what I am allowed to gift in this way?

Question 2: as I understand it, HMRC regard the change in status of retained income into capital as occurring after two years. I have made no gifts of income ever before, and would like the first of my regular gifts to include retained surplus income for the past 24 months. Have I understood correctly that this would be allowed?

Most grateful for any help on these points.

getmore4less

Have you had a look at the legislation and the guide fo HMRC people in their manual, both on-line.
(don't have links handy but easy to find)

xylophone

http://www.mitchells-roberton.co.uk/bullet-point-updates-2012/hmrc-revised-approach-to-normal-expenditure-exemption/

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/373533/IHT403.pdf

http://www.lawskills.co.uk/articles/2013/03/ten-steps-to-securing-the-iht-income-exemption/

may assist?

Keep_pedalling

It depends on what you clase as reasonable household expenditures. Holidays have to be included, so if you are used to having expensive holidays that are paid from savings then that would somewhat reduce your margins. Unexpected big bills like a boiler replacement would also affect the amount you could gift in any particular year.

le_loup

If you know your expenditure each year, it should be very easy to establish at year end how much to gift.

CLAPTON

presumably if your year on year total saving plus investment, is broadly constant then that would show you are only spending income

Keep_pedalling

Would it not be simpler to gift a larger sum outright with a 7 year life cover policy to compensate in case of an unexpected early death. It would give your executor a much simpler task in the long run.

kidmugsy

Keep_pedalling wrote: »

Unexpected big bills like a boiler replacement would also affect the amount you could gift in any particular year.

I don't think so: if memory serves, there's a "taking one year with another" get-out.

kidmugsy

Keep_pedalling wrote: »

with a 7 year life cover policy to compensate in case of an unexpected early death. It would give your executor a much simpler task in the long run.

(i) Ensure that the insurance pay-off doesn't enter the estate; ensure it goes to the son.
(ii) The insurance premiums will need to be treated either as part of the £3k p.a. exempted amount, or as normal expenditure out of surplus income.

No doubt it's routine for an IFA to get these details right.

dxt_2

OP: many thanks to all who responded, some very useful information