7 year rule on gifts

relaxtwotribes

I understand that the size of the estate is a criterion when HMRC decide to take a closer look. It can be as small as £1m.
One of the things they look closely at is when someone sells the family home in order to go into a care home. HMRC know that this event provides the opportunity for relatives to hive off some of the proceeds - so they will want executors to demonstrate where the house sale proceeds went to.

[Deleted User]

Linton wrote: »

The estate for which I was an executor included gifts totalling 6 figures. It took some work to extract the data and prove that they all met the "gifts from income" rules. To help HMRC I was able to provide perhaps 20 pages of annotated bank statements and tables showing that there was no depletion of savings. Hopefully they checked them all.

How would you define "gifts from income?" Is it money that is given away before it goes into a savings/investment account? Is it money earned in the current fiscal year before it is 'put away'? Even if it had been 'saved', can it not be referred to as a deferment or delay in making such a gift.

One could argue the point that any money that has been withdrawn from a savings account and given away as a gift, is by definition a gift from income. What else would the origination of that money be if not earned income? Money laundering perhaps. Even that can be regarded as earned income, although by illegal practices

As a lot of people say, it is not easy for authorities to control/monitor. The whole process relies on people being honest!
And we all know how reliable that is.

Linton

Gifts from income come from surplus income beyond that needed to maintain your normal lifestyle. So you can’t claim gifts from income if you are withdrawing money from your capital. You need to show this giving is part of your normal expenditure, or rather your executor does.

Income becomes capital after a year or two. Whether it is in a current account, savings account or invested is irrelevant. There doesn’t seem to be any defined timeframe but HMRC will allow this sort of leeway.

[Deleted User]

Linton wrote: »

Gifts from income come from surplus income beyond that needed to maintain your normal lifestyle. So you can’t claim gifts from income if you are withdrawing money from your capital. You need to show this giving is part of your normal expenditure, or rather your executor does.

Income becomes capital after a year or two. Whether it is in a current account, savings account or invested is irrelevant. There doesn’t seem to be any defined timeframe but HMRC will allow this sort of leeway.

That's my whole point - it's all conjecture. Who decides my normal lifestyle? I could spend 20K in one year (perhaps on a cruise or 2), but then drop to half that in a subsequent year. How an executor is expected to prove the origination of lifetime gifts is beyond me, and it's even more absurd that an executor could be held responsible for any wrong assumptions.

Linton - thank you for your explanation. The more I read about IHT, the more ridiculous it becomes. The sooner the gov reviews this tax, the better. Although that could easily make things. worse!!

Linton

[quote=[Deleted User];74710408]That's my whole point - it's all conjecture. Who decides my normal lifestyle? I could spend 20K in one year (perhaps on a cruise or 2), but then drop to half that in a subsequent year. How an executor is expected to prove the origination of lifetime gifts is beyond me, and it's even more absurd that an executor could be held responsible for any wrong assumptions.

Linton - thank you for your explanation. The more I read about IHT, the more ridiculous it becomes. The sooner the gov reviews this tax, the better. Although that could easily make things. worse!![/QUOTE]

IHT is pretty straightforward as long as you are not trying to get around the rules. If you want to claim valuable allowances such as gifts from income it is up to you to justify your claim. It shouldn’t be too difficult, just match annual income and annual expenditure from bank statements or look at the savings account or investment account statements. If you cannot do that, tough.

Similarly for significant gifts. Again just going through the bank statements should identify any large anomalous payments. The odd £20 or even £200 slipped to a grandchild doesn’t really matter.

The restrictions and some complexity are necessary to prevent IHT being completely voluntary, whilst not over-penalising perfectly reasonable behaviour.

Tom99

Linton wrote: »

IHT is pretty straightforward as long as you are not trying to get around the rules. If you want to claim valuable allowances such as gifts from income it is up to you to justify your claim. It shouldn’t be too difficult, just match annual income and annual expenditure from bank statements or look at the savings account or investment account statements. If you cannot do that, tough.

Similarly for significant gifts. Again just going through the bank statements should identify any large anomalous payments. The odd £20 or even £200 slipped to a grandchild doesn’t really matter.

The restrictions and some complexity are necessary to prevent IHT being completely voluntary, whilst not over-penalising perfectly reasonable behaviour.

[FONT=Verdana, sans-serif]If its the executor trying to claim gifts from surplus income with no help left by the donor I don't think it would be strightforward to come up with the detailed analysis required by form IHT403 over the past 7 yrs, its hard enough to do your own.[/FONT]
[FONT=Verdana, sans-serif]
[/FONT][FONT=Verdana, sans-serif]As an experiment, to see if I could afford gifts from income, I have analysed my own income/expenditure for the past two tax years.[/FONT]
[FONT=Verdana, sans-serif]
[/FONT][FONT=Verdana, sans-serif]Each years analysis took several hours to do because first you need to download every entry from every account which might contain income or expenditure to a spreadsheet which is not always available. For example my Halifax credit card is only available in monthly PDF files so that involves downloading 12 files and copying the data from each to a spreadsheet.[/FONT]
[FONT=Verdana, sans-serif]
[/FONT][FONT=Verdana, sans-serif]Then you have to trawl through every single item and allocate it to a category in sufficient detail to complete IHT403. You would also need the cheque book stubs to categorise those. [/FONT]

Thrugelmir

relaxtwotribes wrote: »

HMRC know that this event provides the opportunity for relatives to hive off some of the proceeds - so they will want executors to demonstrate where the hose sale proceeds went to.

Correspondingly the cash will show up somewhere else. New car, house purchase etc, large amount of deposit interest. Connecting events isn't difficult.

kidmugsy

Thrugelmir wrote: »

Correspondingly the cash will show up somewhere else. New car, house purchase etc, large amount of deposit interest. Connecting events isn't difficult.

It were gamblin winnins guv, wunnit?

Linton

The IHT forms arent exam papers. You don’t lose points if you dont fill them in exactly as per instructions or gain a bonus if you provide everything in brain-numbing detail. Rather look at them as an opportunity to provide the information HMRC require to the best of your abiliy and at a level of detail that is appropriate given the amount of money involved.

The income is probably pretty obvious from the bank statements. Total annual expenditure can then be worked out fairly easily. Years with unusual levels of expenditure can be examined in greater detail. Large personal gifts are probably pretty obvious and it is a little difficult to make them by credit card.

All of this is obviously much easier if the deceased has left explanatory notes. So as has been said many times on this forum document if you are making gifts, document them. This is especially important if you are making gifts with the intention of reducing tax by claiming that they are gifts from income.

Triumph13

How do they treat drawdown from a DC pension as regards the gifts from income rules? Is it automatically income because you paid income tax when you drew it out?