PETs - IHT403

MumOf2

Hello all you wonderful people

Advice would be much appreciated. I'm in the process of getting figures together to complete IHT403 - potentially exempt transfers. It requires figures for gross income less income tax and net income, also expenditure under various headings. So I'm going through bank statements for the past seven years trying to get all the background figures together.

Just a couple of questions:

1. How comprehensive and exact do these figures have to be? Income, tax and net income is easy. But do you have to include every single one penny spent? Or is there a more broad-brush approach so you include all the bigger items such as council tax, utilities obviously, then also there's a heading 'other' - how far do you go with this? It's proving really difficult to identify exactly what each item was for (a lot of them are cheques and I can't locate the cheque stubs going back to 2012) and there are cash withdrawals that I can't possibly know how they were spent.

2. Some expenditure is more capital than income, e.g. home improvements, a chairlift, defined non-recurring costs. How do you distinguish between this and recurring normal household costs? If HMRC were to go through the statements, how would they identify whether something is capex or expenditure from income?

3. £3,000 a year is allowed as a non-IHTable transfer. Do you include this £3,000 (in our case divided between two of us and transferred on 6 April every year for the past probably 25 years) in IHT403 or ignore it as it's defined as an annual exempt transfer?

4. Do you count 7 years back from the date of death on a full-year basis or by full month or from the exact date of death? For example, if someone dies on 25 March 2019, do you:
i) look back to the full financial year 06/04/2011-05/04/2012 and work forward, or
ii) take it from 1 March 2012 onwards, or
iii) take it from 25 March 2012 onwards, or
iv) take it from the full financial year 06/04/2012-05/04/2013?

We have been receiving regular transfers on a monthly, quarterly and annual basis for the past at least 15 years which is so really wonderful, but it does concern me that HMRC will now go through all entries on bank statements for the past 7 years and this could stir up a hornets' nest! There are letters of intent to both of us signed by my mother so we've covered that one at least.

Thank you in advance.

MumOf2
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Keep_pedalling

It’s actually quite simple. Every penny coming out of her current account and savings is expenditure, this includes things like a new roof or a loaf of bread. It also includes gifts, so unless income exceeds personal expenditure by more than £3000pa then you cant claim gifts from excess income as it is all covered by your annual allowance.

MumOf2

Thanks, KP. Bad news for us, good news for HMRC...

MumOf2
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Tom99

MumOf2 wrote: »

Hello all you wonderful people

Advice would be much appreciated. I'm in the process of getting figures together to complete IHT403 - potentially exempt transfers. It requires figures for gross income less income tax and net income, also expenditure under various headings. So I'm going through bank statements for the past seven years trying to get all the background figures together.

Just a couple of questions:

1. How comprehensive and exact do these figures have to be? Income, tax and net income is easy. But do you have to include every single one penny spent? Or is there a more broad-brush approach so you include all the bigger items such as council tax, utilities obviously, then also there's a heading 'other' - how far do you go with this? It's proving really difficult to identify exactly what each item was for (a lot of them are cheques and I can't locate the cheque stubs going back to 2012) and there are cash withdrawals that I can't possibly know how they were spent.

2. Some expenditure is more capital than income, e.g. home improvements, a chairlift, defined non-recurring costs. How do you distinguish between this and recurring normal household costs? If HMRC were to go through the statements, how would they identify whether something is capex or expenditure from income?

3. £3,000 a year is allowed as a non-IHTable transfer. Do you include this £3,000 (in our case divided between two of us and transferred on 6 April every year for the past probably 25 years) in IHT403 or ignore it as it's defined as an annual exempt transfer?

4. Do you count 7 years back from the date of death on a full-year basis or by full month or from the exact date of death? For example, if someone dies on 25 March 2019, do you:
i) look back to the full financial year 06/04/2011-05/04/2012 and work forward, or
ii) take it from 1 March 2012 onwards, or
iii) take it from 25 March 2012 onwards, or
iv) take it from the full financial year 06/04/2012-05/04/2013?

We have been receiving regular transfers on a monthly, quarterly and annual basis for the past at least 15 years which is so really wonderful, but it does concern me that HMRC will now go through all entries on bank statements for the past 7 years and this could stir up a hornets' nest! There are letters of intent to both of us signed by my mother so we've covered that one at least.

Thank you in advance.

MumOf2
x

My view on your questions:


1 - You include every penny of income and expenditure. Don't forget to include savings interest, dividends incl those from accumulation funds. Cash and cheque you cannot identify just list under 'other'

2 - Include repair type items but its up to you to decide when an item is not normal revenue expenditure. Perhaps list separately in the notes those 'capital' items you have excluded to show you are being honest and open. A house extension would seem to be capital but what about a brand new car, or a 2nd hand car?

3 - Fill in the breakdown of income/expenditure on page 6 of IHT403 ignoring the £3,000pa allowance. At the bottom of that sheet you can see whether all the gifts came from surplus income. Gifts not from surplus income can be set against the other allowances, £3,000pa incl a c/f for one year of the £3,000 if gift not made the previous year.

4 - The breakdown required on page 6 of IHT403 is by tax year which makes the analysis easier but it is only gifts 7yrs before the date of death which could fail the surplus income test.

WaywardDriver

Interested in this thread as just about to start recording figures to support PET gifts. I've set-up a spreadsheet for this using 2018/19 current account and credit card figures as test. While I'm confident I can account for all income and expenditure, the credit card transactions, in particular, are time-consuming to categorise as consist of food, clothes, car, holidays, dining out etc.
Also uncertain as to what constitutes the IHT403 expenditure categories e.g. Household Bills includes food and clothes? Travelling includes car fuel? Entertainment includes dining out?
It would be much easier to ignore several of the the expenditure categories and include an all encompassing Credit Card category. Would this be acceptable to HMRC?

Tom99

WaywardDriver wrote: »

Interested in this thread as just about to start recording figures to support PET gifts. I've set-up a spreadsheet for this using 2018/19 current account and credit card figures as test. While I'm confident I can account for all income and expenditure, the credit card transactions, in particular, are time-consuming to categorise as consist of food, clothes, car, holidays, dining out etc.
Also uncertain as to what constitutes the IHT403 expenditure categories e.g. Household Bills includes food and clothes? Traveling includes car fuel? Entertainment includes dining out?
It would be much easier to ignore several of the the expenditure categories and include an all encompassing Credit Card category. Would this be acceptable to HMRC?

I would expect your executor to have to provide detail down to the IHT403 page 6 level and also to be able to back up that figure with a detailed breakdown.
I am doing the same as you so starting my own IHT403.
The way I put a category against every item of expenditure is to have my current account and credit card account in a spreadsheet then use the data filter function and use 'begins with' or 'contains'. 'Begins with' 'Asda' will be food and so on. You can usually label the majority of expenditure that way leaving a few individual items to categorise. Then use a pivot table to summarise the expenditure into the IHT403 headings.

WaywardDriver

Tom99 wrote: »

I would expect your executor to have to provide detail down to the IHT403 page 6 level and also to be able to back up that figure with a detailed breakdown.
I am doing the same as you so starting my own IHT403.
The way I put a category against every item of expenditure is to have my current account and credit card account in a spreadsheet then use the data filter function and use 'begins with' or 'contains'. 'Begins with' 'Asda' will be food and so on. You can usually label the majority of expenditure that way leaving a few individual items to categorise. Then use a pivot table to summarise the expenditure into the IHT403 headings.

So you seem to be confirming HMRC require the detail laid out as per IHT403 p6 which I was afraid of due to the extra work required.
I'm using a different spreadsheet approach - lookup to categorise common transactions (e.g. ASDA), filter to identify uncategorised Other Expenditure and expand lookup list if necessary, finally SUMIFS to sum by year and category.
At present all expenditure is split 50:50 between the two of us but there will come a time when this changes to 100:0 so the corresponding tax year needs split into 2 - have modified spreadsheet accordingly but obviously yet to be tested.

getmore4less

MSMoney has all you need built in no need to reinvent the wheel.

Split transactions deal with a single bill into multiple categories.

Run cash account for those withdrawals.

WaywardDriver

getmore4less wrote: »

MSMoney has all you need built in no need to reinvent the wheel.
Split transactions deal with a single bill into multiple categories.
Run cash account for those withdrawals.

I've essentially setup a turnkey system whereby you import all transactions after the end of each tax year, the formulae then automatically recalculate and populate the IHT403 form. The only user intervention is to examine Other Expenditure transactions and re-categorise if necessary. Not sure if this is possible with your MSMoney suggestion.

MumOf2

Tom99 wrote: »

My view on your questions:


1 - You include every penny of income and expenditure. Don't forget to include savings interest, dividends incl those from accumulation funds. Cash and cheque you cannot identify just list under 'other'

2 - Include repair type items but its up to you to decide when an item is not normal revenue expenditure. Perhaps list separately in the notes those 'capital' items you have excluded to show you are being honest and open. A house extension would seem to be capital but what about a brand new car, or a 2nd hand car?

3 - Fill in the breakdown of income/expenditure on page 6 of IHT403 ignoring the £3,000pa allowance. At the bottom of that sheet you can see whether all the gifts came from surplus income. Gifts not from surplus income can be set against the other allowances, £3,000pa incl a c/f for one year of the £3,000 if gift not made the previous year.

4 - The breakdown required on page 6 of IHT403 is by tax year which makes the analysis easier but it is only gifts 7yrs before the date of death which could fail the surplus income test.

Thanks Tom. That's really useful. I've done two years now and can see a definite pattern in income and expenditure. The first year there's a small surplus after expenditure and PETs; the second a small loss.

The most worst result will be £50K in IHT assignable to the PETs so considering we've had the benefit of all these transfers over the past 15 years, I don't think that's too bad. And that's the absolute worst it could be. With all the other nil band allowances that we can use, I think it's actually quite fair and I thought it was going to be much worse than it will be.

MumOf2
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Robert_McGeddon

Presumably the Estate (incl PETs) will be subject to IHT? If not, detailed analysis is a waste of time.

The bottom line (22) on page 8 of IHT403 is the excess of income over expenditure each year. This, less gifts, represents the increase in bank balances over each year (but be careful if investment accounts have movements.) Therefore:

1 You can use this to prove/reconcile the detailed numbers, or
2 If the detail is very onerous you could pick out the big numbers and call everything else "other" just to prove back to the movement in cash balances.

Also, the relative size of the gifts out of income may influence HMRC's interest (and your attention to detail!) If the annual excess income were £20,000 and the gifts £5,000 (of which I'm assuming £3,000 would be covered by the annual exemption) they probably wouldn't be too excited. Not so if the gifts were £18,000 per annum as there is both the scope to challenge allowability and a greater potential tax take.