PETs - IHT403

Robert_McGeddon

If the person whose estate is in question completed tax returns this would be a good place to get the income figures from. Indeed, not using this source may cause problems.

Keep_pedalling

Robert_McGeddon wrote: »

If the person whose estate is in question completed tax returns this would be a good place to get the income figures from. Indeed, not using this source may cause problems.

That would require the testator to either keep paper or PDF copies of the last 7 years returns. It’s not something I do, but even if I did the returns do not include dividends or interest earned in ISAs so are of limited use for most people.

WaywardDriver

Keep_pedalling wrote: »

That would require the testator to either keep paper or PDF copies of the last 7 years returns. It’s not something I do, but even if I did the returns do not include dividends or interest earned in ISAs so are of limited use for most people.

The income is easy for me from payslip/P60 and investment interest reports but expenditure is more difficult. It's easy to get total expenditure from bank and credit accounts but categorisation into the IHT403 categories is the problem. That's why I was wondering how accurate the categorisation needs to be provided the total expenditure is correct.

Keep_pedalling

WaywardDriver wrote: »

The income is easy for me from payslip/P60 and investment interest reports but expenditure is more difficult. It's easy to get total expenditure from bank and credit accounts but categorisation into the IHT403 categories is the problem. That's why I was wondering how accurate the categorisation needs to be provided the total expenditure is correct.

I do not think you really need to worry about strict accuracy, if you can’t fathom what some outgoings were for HMRC are not going to be able to sort them either. Cash withdrawals for instance could have been used for anything, from buying veg to gambling. Putting cash into household expenses or other is not going to make a lot of difference. What might trigger a challenge is if your figures for things like household expenses being unrealistically low.

The important thing is to have the evidence for the overall figures you provide in case you are challenged by HMRC.

MumOf2

Robert_McGeddon wrote: »

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.

Thanks for the advice, Robert, and for the heads up about getting income figures from tax returns (which I have).

Yes, the estate will definitely be IHTable (c.£500,000 IHT) as there's a significant amount of capital and a valuable property as well as a decent monthly income.

The total gifts are £25K a year (exactly the same each year as it's by standing order each month and quarter), annual excess income ranges from about £20K to £30K so some years a bit of a surplus after transfers, sometimes a bit of a deficit after transfers.

I'll keep on trawling through all these bank statement entries!

MumOf2
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getmore4less

HMRC are a little bit flexible on when excess income becomes capital so you can carry over surplus to fund the deficit years.

don't forget to go through the HMRC manual as well that covers quite a few of the nitty gritty bits of gifts from surplus income.

Tom99

MumOf2 wrote: »

Thanks for the advice, Robert, and for the heads up about getting income figures from tax returns (which I have).
Yes, the estate will definitely be IHTable (c.£500,000 IHT) as there's a significant amount of capital and a valuable property as well as a decent monthly income.
The total gifts are £25K a year (exactly the same each year as it's by standing order each month and quarter), annual excess income ranges from about £20K to £30K so some years a bit of a surplus after transfers, sometimes a bit of a deficit after transfers.
I'll keep on trawling through all these bank statement entries!
MumOf2
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If you use tax returns for income remember to add any tax free income from ISAs.

Robert_McGeddon

MumOf2 wrote: »

Thanks for the advice, Robert, and for the heads up about getting income figures from tax returns (which I have).

Yes, the estate will definitely be IHTable (c.£500,000 IHT) as there's a significant amount of capital and a valuable property as well as a decent monthly income.

The total gifts are £25K a year (exactly the same each year as it's by standing order each month and quarter), annual excess income ranges from about £20K to £30K so some years a bit of a surplus after transfers, sometimes a bit of a deficit after transfers.

I'll keep on trawling through all these bank statement entries!

MumOf2
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It sounds like the gifts will qualify (wholly or mainly) as exempt transfers out of income. As Tom99 said, add in any ISA income. The income side of things is then readily auditable by HMRC should that prove necessary.

Presumably the £25,000 pa you quote for gifts is before deducting the £3,000 annual allowance - claiming this helps your case (although I think this is separate from the gifts out of income). However you say in point 3 of your original post that this is shared - if someone else has been receiving gifts over and above the £25,000 pa mentioned then it is likely not all of the gifts can be considered as gifts out of income.

I trust your "annual excess income" figures are after tax? They should be.

£500,000 of IHT is a tidy sum. HMRC will be interested. Are you DIY-ing this? If so, I think you should consider taking professional advice. If you're doing all the legwork it need not be too expensive.

MumOf2

Thanks, Robert and Tom

Robert_McGeddon wrote: »

It sounds like the gifts will qualify (wholly or mainly) as exempt transfers out of income. As Tom99 said, add in any ISA income. The income side of things is then readily auditable by HMRC should that prove necessary.

Will do.

Presumably the £25,000 pa you quote for gifts is before deducting the £3,000 annual allowance - claiming this helps your case (although I think this is separate from the gifts out of income).

No, the £25,000 is after deducting the £3,000 annual allowance. It's £28,000 in all.

However you say in point 3 of your original post that this is shared - if someone else has been receiving gifts over and above the £25,000 pa mentioned then it is likely not all of the gifts can be considered as gifts out of income.

The £25,000 is shared equally between two of us.

I trust your "annual excess income" figures are after tax? They should be.

Yes.

£500,000 of IHT is a tidy sum. HMRC will be interested. Are you DIY-ing this? If so, I think you should consider taking professional advice. If you're doing all the legwork it need not be too expensive.

We'll do all the legwork now in preparation - sounds a bit morbid but we've just done one probate application and realise that it would have been so much more straightforward at such an emotional time to have been documenting income and expenditure as we went along rather than doing it all post mortem. That one went just fine and HMRC accepted our figures without demur.

Then for this one, when the inevitable happens we'll have all the detailed figures in front of us and can decide how to proceed in re instructing a probate professional.

In the meantime, I'm getting all my personal financial records organised and documented as I don't want my husband and chdn to have to go through all this when I shuffle off this mortal coil.

MumOf2
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Robert_McGeddon

MumOf2 wrote: »

We'll do all the legwork now in preparation - sounds a bit morbid but we've just done one probate application and realise that it would have been so much more straightforward at such an emotional time to have been documenting income and expenditure as we went along rather than doing it all post mortem. That one went just fine and HMRC accepted our figures without demur.

Then for this one, when the inevitable happens we'll have all the detailed figures in front of us and can decide how to proceed in re instructing a probate professional.

x

MumOf2,

Sounds like you're well organised and thinking ahead - good news.

Congrats on your successful probate exercise. Did it include paying IHT? If so, then double congrats!

I hadn't realised until your most recent post that you were referring to a future probate situation. I may be speaking out of turn but I really think you should consider getting your relative to get professional estate planning advice. The cost would be paid before probate and would therefore be tax effective. IHT of £500K implies an estate worth circa £1.7 - £2.2Million. This is substantial. It is possible that actions taken while your relative is still alive could result in more of the estate being passed on. An immediate thought is that if a large chunk is earmarked for you and in turn you intend passing the residue on to your kids then there will be a 2nd IHT hit. Bypassing you or setting up a trust may mitigate some of this. If the advice costs £5,000 that's only 1% of the tax involved. I think it likely the advice would pay for itself and even if if didn't at least you get certainty that you weren't paying too much tax. I'd personally aim for a medium sized firm of Chartered Accountants with estate planning specialism. But I'm speculating . . . and well outside your original post!