Inheritance Tax question

Cardew

Keep_pedalling wrote: »

Not sure about many couples having huge surplus income to give away. Any couple with surplus income would need in excess of £6,000 surplus income to take advantage of this, as below that level you would be covered by your annual exemptions (which are counted as normal expenditure)

Normal expenditure also includes big ticket items that you have to raid your savings, most people don't pay for things like new cars or major expenditure on their home from income.

As said above the £6,000 surely can come from savings.

In the extreme there must be couples with an income of £millions pa.

Plenty of retired couples - say middle ranking civil servants/army officers/bank managers etc can easily both have a pension/investment income in excess of £30k and can live on one income.

getmore4less

Cardew wrote: »

As said above the £6,000 surely can come from savings.

In the extreme there must be couples with an income of £millions pa.

Plenty of retired couples - say middle ranking civil servants/army officers/bank managers etc can easily both have a pension/investment income in excess of £30k and can live on one income.

plenty of mid ranges couples can get to £50k+ with occupational and state pensions.

add teachers, nurses.

Keep_pedalling

getmore4less wrote: »

plenty of mid ranges couples can get to £50k+ with occupational and state pensions.

add teachers, nurses.

Yes, but most will also (hopefully) have a lifestyle to match that income. Certainly part of our IHT planning involves spending somewhat above our income for the foreseeable future.

On a side point does drawdown from a SIPP count as income? We don’t have one just curious.

Tom99

Keep_pedalling wrote: »

Yes, it can come from from capital, but is still counted as expenditure, as is everything else that comes out of your savings. Surplus income is simply income less any expenditure, and expenditure includes gifts. So if any of your annual allowance is used up any surplus income is reduced by the same amount.

[FONT=Verdana, sans-serif]No I don't think that's how it works. The £3,000 exemption and also the £250 to anyone and wedding gifts are in addition to the gift from surplus income.

[/FONT] [FONT=Verdana, sans-serif]In calculating surplus income you only need to deduct normal expenditure and you would only deduct those gifts for which you wanted to claim surplus expenditure exemption. The other gifts, which can come from capital, can be covered by the other exemptions or the 7 year rule if not.

[/FONT] [FONT=Verdana, sans-serif]This guidance note make clear that these other exemptions are in addition to the £3,000 one:-

[/FONT] [FONT=Verdana, sans-serif]https://www.gov.uk/inheritance-tax/gifts[/FONT]

Keep_pedalling

Tom99 wrote: »

[FONT=Verdana, sans-serif]No I don't think that's how it works. The £3,000 exemption and also the £250 to anyone and wedding gifts are in addition to the gift from surplus income.

[/FONT] [FONT=Verdana, sans-serif]In calculating surplus income you only need to deduct normal expenditure and you would only deduct those gifts for which you wanted to claim surplus expenditure exemption. The other gifts, which can come from capital, can be covered by the other exemptions or the 7 year rule if not.

[/FONT] [FONT=Verdana, sans-serif]This guidance note make clear that these other exemptions are in addition to the £3,000 one:-

[/FONT] [FONT=Verdana, sans-serif]https://www.gov.uk/inheritance-tax/gifts[/FONT]

That link is anything but clear, as I pointed out in an earlier post that page seems to have been designed to confuse rather than clarify. Yes you can use use more one allowance on the same person, but that page contains little detail and blaring errors. Anyone using just that for guidance will be misled into thinking that taper relief apply to all gifts, when in fact it only apples to the portion of gifts made within 7 years that exceed £325k, so does not apply to 99% of us.

It also fails to say that your gifts count as expenditure, so for example, if I have a surplus income of £6000 and I then give my annual allowance away, my excess income drops to £3000, so if I give another £6000 away only half of that can be claimed as gifts from excess income and the other half is PET so stays in your estate for 7 years.

Keep_pedalling

Gifts from excess income is the most complex of your exemptions, so if you are planning to use it, take professional advice first, and keep very good records, otherwise you could be leaving your executor with a very difficult job on their hands.

Tom99

Keep_pedalling wrote: »

That link is anything but clear, as I pointed out in an earlier post that page seems to have been designed to confuse rather than clarify. Yes you can use use more one allowance on the same person, but that page contains little detail and blaring errors. Anyone using just that for guidance will be misled into thinking that taper relief apply to all gifts, when in fact it only apples to the portion of gifts made within 7 years that exceed £325k, so does not apply to 99% of us.

It also fails to say that your gifts count as expenditure, so for example, if I have a surplus income of £6000 and I then give my annual allowance away, my excess income drops to £3000, so if I give another £6000 away only half of that can be claimed as gifts from excess income and the other half is PET so stays in your estate for 7 years.

[FONT=Verdana, sans-serif]I agree that the guidance on taper relief is downright misleading but the confirmation that the £3,000 exemption is in addition to surplus income exemption is quite clear, “each year you can also give away”....

[/FONT] [FONT=Verdana, sans-serif]There seem to be plenty online examples showing how you can add the £3,000 to a surplus income exemption, here is just one example:

[/FONT] [FONT=Verdana, sans-serif]https://www.howardkennedy.com/media/504667/gifts-out-of-income.pdf[/FONT]

[FONT=Verdana, sans-serif]I think the actual legislation also covers this point when referring to the gifts which should be deducted to calculate this expenditure:

[/FONT] “[FONT=Verdana, sans-serif]after allowing for all transfers of value forming part of his [/FONT][FONT=Verdana, sans-serif]normal[/FONT][FONT=Verdana, sans-serif] expenditure, the transferor was left with sufficient income to maintain his usual standard of living”

[/FONT] [FONT=Verdana, sans-serif]So you only deduct those gifts which you wish to claim as being part of you normal expenditure not the other gifts you have made out of capital.[/FONT]

getmore4less

check the HMRC manual rather than .gov

https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm14000

getmore4less

Tom99 wrote: »

I agree that the guidance on taper relief is downright misleading

not really if you read the page properly.

The 7 year rule
If there’s Inheritance Tax to pay, it’s charged at 40% on gifts given in the 3 years before you die.

Gifts made 3 to 7 years before your death are taxed on a sliding scale known as ‘taper relief’.

only because people don't understand what my bolded bit means and assume all of a gift if not previously exempt is taxable because they missed(failed to understand) this bit earlier on the page.

People you give gifts to will be charged Inheritance Tax if you give away more than £325,000 in the 7 years before your death.

Tom99

getmore4less wrote: »

not really if you read the page properly.

only because people don't understand what my bolded bit means and assume all of a gift if not previously exempt is taxable because they missed(failed to understand) this bit earlier on the page.

[FONT=Verdana, sans-serif]The misleading part is what comes next :

[/FONT] “[FONT=Verdana, sans-serif]Gifts made 3 to 7 years before your death are taxed on a sliding scale known as ‘taper relief’.[/FONT]
[FONT=Verdana, sans-serif]4 to 5 years = 24%”

[/FONT] [FONT=Verdana, sans-serif]Taking the above at face value a single gift of say £100k, 4 years before death, would be taxed at 24%.

[/FONT] [FONT=Verdana, sans-serif]But that is not what actually happens, the £100k is deducted from the nil rate band and the taxable estate increases by £100k taxed at 40%. So the gift 4 years ago is still taxed at an effective rate of 40% not 24%.[/FONT]