Inheritance Tax - gift allowance v gift from income

Skibunny40

Not sure if this is the right board, please advise me to move if necessary.

I'm trying to understand the difference between the annual gift allowance of £3k, versus the "gift from income" as far as IHT is concerned.

Hypothetically - I could give my daughter £300 per month comfortable out of my income, which would be £3600 over the year. But if instead,I gave her a lump sum of £3600 at the end of the year (put £300 into a savings accounts each month in my name then gave to her as a lump sum), and then died, am I right in thinking that HMRC would ignore the monthly payment for IHT purposes, but would have issues with the £600 over the £3k limit because it was a lump sum?

That seems bizarre to me, so I'm hoping someone else can explain what I'm not understanding! Thanks!

Savvy_Sue

Is your total estate when you die going to be more than £325,000? If not, you have nothing to worry about wrt IHT in any event.

If yes, there are some supplementary questions ...

Skibunny40

Hopefully it will be!

Please fire away with the supplementary questions...

Keep_pedalling

Do you actually spend £600 a year less than you earn? And by that I include big ticket item like replacement cars or expensive holidays that come out of savings.

If you really don't have enough spare income to cover those gifts, and your estate is actually subject to IHT their are other options. You can gift as much as you like and providing you survive 7 years it will fall out of your estate. Providing you are in good health and not too old you can cover the event of an unexpectedly early demise by taking out term life insurance, which would cover any tax on gifts given in the preceading 7 years.

Skibunny40

I like those other suggestions, thank you.

But what about my original concept, assuming I have enough monthly income to cover the monthly payment to my daughter, without difficulty?

Am I right in thinking it's better (from an IHT perspective) to do it monthly rather than a yearly lump sum?

xylophone

Keep records to establish the regular pattern of gifts.

http://www.pruadviser.co.uk/content/knowledge/technical-centre/normal-expenditure-facts/

This is archive material but may be of interest.

http://webarchive.nationalarchives.gov.uk/20060213211319/inlandrevenue.gov.uk/leaflets/iht2.pdf

Keep_pedalling

Skibunny40 wrote: »

I like those other suggestions, thank you.

But what about my original concept, assuming I have enough monthly income to cover the monthly payment to my daughter, without difficulty?

Am I right in thinking it's better (from an IHT perspective) to do it monthly rather than a yearly lump sum?

At only £600 a year you are not going to lower your estates potential IHT that much. We have given both our children substantial one off gifts to get them on the housing ladder in an expensive part of the country, and we also give them our annual £3000 every year. We can't gift from income because the other ways of reducing IHT is to spend generously on ourselves and with charitable giving, so our outgoings are higher than our income.

I would gift as much up front as you can. We are in our early 60's and have a second life policy which will cover a tax bill of around £200k which costs us just £19 a month.

Skibunny40

That Prudential sheet is brilliant - thanks so much Xylophone!

Skibunny40

Keep Pedalling - I like your style in terms of reducing your IHT liability by just having a fantastic lifestyle - might have to follow that plan!

It wasn't so much about the £600, as the concept in general. I found from the Pru sheet that Xylophone kindly provided the link to, that unspent/leftover income becomes classed as capital by HMRC after two years - I'd always wondered about that, as most capital is saved in the form of unspent income initially (except gifts and inheritance obviously)

Savvy_Sue

So the main supplementary: do you have a spouse's IHT allowance to add to yours? Assuming you were married to your DD's other parent (haven't yet worked out if you are Mum or Dad), and they have died while you were still married, anything they left to you will be added to your IHT allowance - potential max £650,000.

If you were not married, or have divorced, you can ignore that bit, but the other thing to remember is the new 'passing on a house' exemption which someone else will have to explain. It's not yet in force but may well be helpful to you.

getmore4less

In another month the residential nil rate band kicks in, the numbers go up.