IHT gift exemptions

Irratus_Rusticus

I've been researching all matters probate to see what my children as my executors would face. I thought I and they could ignore IHT concerns as my estate will fall significantly short of the IHT threshold even before the RNRB allowance.

Meanwhile I make annual cash gifts and if I understand the guidance and form IHT205, gifts made in the seven years prior to death that exceed gift thresholds must still be listed out in IHT205 to arrive at the chargeable total even if IHT is not triggered?

I'm unclear how the £3000 annual exemption and the 'gifts out of normal expenditure' £3000 exemption work together?

'Normal expenditure' gifts made out of income must be listed in full if totalling over £3000 in a year, without any exemption allowed. Annual gifts can have £3,000 allowable exemption deducted.

An example is given in the guide IHT206 of a deceased making gifts from income of £5000 total in each of three years, as well as annual gifts of £3000 in each of three years. Total gifts = £5000 x 3 plus £3000 x 3 = £24,000, from which three annual exemptions are deducted = £24,000 - £9,000 = chargeable value: £15,000.

What if the deceased above only made monthly standing order 'normal expenditure' payments from income totalling £5,000 in each of three years?

I'm assuming that everyone has an annual gift exemption of £3,000 so this can still be applied? i.e. the gifts can be treated as part annual gifts (£3,000 a year) and the balance (£2,000) as qualifying regular payments, resulting in nil chargeable?

I like to complicate things.:(

getmore4less

If the estate including gifts won't ever go over the nil rate band(including residential and transferable) it really is a redundant paper exercise trying to document gifts from income.

Put them down as failed PETs.

Much less work for everyone.

Keep_pedalling

You have missed a vital word out of the above. Each of us have an annual IHT exempt allowance of £3000, only people who are gifting from excess income can claim an gift additional money that falls straight out of the estate.

If you do have excess income then you need to keep full records of income and expenditure otherwise your executors are going to struggle. As it seems your estate is unlikely to see any IHT then it is probably not worth bothering to claim this exemption unless the excess income is such that your savings are increasing significantly and will push you into IHT territory within a few years.

Tom99

Your children would need to complete form IHT403 in particular sections 20/21/22 in order to claim gifts came from normal expenditure.
https://www.gov.uk/government/publications/inheritance-tax-gifts-and-other-transfers-of-value-iht403
Unless you start keeping records to the level of detailed breakdown required on the form it would be very difficult for your children to dig out that detail.

Irratus_Rusticus

Thanks for replies.

@getmore4less
It does seem overkill to have to list gifts over the gift limits even where the total estate including said gifts is well less than IHT bands. I suppose it's to make clear that huge gifts haven't been overlooked that would have taken the gross estate over the nil rate bands. A chicken and egg thing.

I was hoping I'd misread something because the IHT206 guidance talks about a 'small estate' of less than £250K but doesn't say that, even here, non-exempt gifts that don't blow the small estate limit can just be left off the form?

Putting gifts 'down as failed PETS' sounds like listing the gifts anyhow?

@Keep pedalling
If payments are made monthly and leave the payer balancing their normal expenses, isn't this evidence of excess income? Surely the gift payer can still, say, use credit cards as 'normal expenses' and repay them over time too? I don't mean make regular gifts using credit!

I can see the logic of listing gifts without deducting exemptions given the pointlessness of the exercise.

I guess a call to the help line when the time comes will makes all things clearer.

I keep categorised / bank reconciled records of transactions in financial software and also keep all bank and card statements. Easy enough to annually print hard copy lists of dates and gift payments while brain cells still work - after that kids would be on their own but would know they had to check the later statements.

@ Tom99
My reading is that IHT403 is a gift schedule relevant to the full IHT400 form necessary when an estate is not exempt from IHT. IHT403 starts by referring users back to the IHT400 Notes, and those notes in turn refer users to IHT205 for 'less than/equal to excepted estate limit'.

Meanwhile IHT206 notes for IHT205 make no mention of needing IHT403. It's a nice form, mind.

Tom99

Irratus_Rusticus wrote: »

My reading is that IHT403 is a gift schedule relevant to the full IHT400 form necessary when an estate is not exempt from IHT. IHT403 starts by referring users back to the IHT400 Notes, and those notes in turn refer users to IHT205 for 'less than/equal to excepted estate limit'.

Yes you would only go through the faff of claiming gifts were from surplus income if IHT was due, otherwise just list the gift as a PET.

pip895

I would just simply list the gifts - with Name, date and amount. Unless you think it highly likely you will reach the IHT limit (adding current assets to total gifts given in 7 years) then there is no point in doing more.

I have recently done probate for my Dads estate - he was very close to the IHT limit and had excess income that he gifted so we had to fill in IHT403. It was a pain, the income and expenditure divisions are weird.

Keep_pedalling

Excess income is fairly straight forward in that you spend less than than your income. If you are spending on credit cards paying those bills off over time it does not sound like you have excess income.

If you are using savings to buy big ticket items like cars, holidays and house repairs, then that has to be included in your expenditure.

This allowance is aimed at people whose estate will continue to grow in size which will eventually mean that excess income will be subject to 40% tax, and that does not seem to be the case for you.

MumOf2

Keep_pedalling wrote: »

If you are using savings to buy big ticket items like cars, holidays and house repairs, then that has to be included in your expenditure.

Advice from the Probate Helpline in response to a query in the past fortnight was that big ticket, one-off items were outside the requirements of inclusion in page 8, IHT403 as these are usually items of capital expenditure. For example, buying a car (which would then add to assets returnable in IHT400 as value in the estate), one-off mobility aids, capex on house (which would add to value of the property and would then increase taxable estate for IHT purposes).

The rationale is also that these can legitimately come out of capital rather than annual income.

Just my 2p-worth and I really hope that the person who provided this advice is correct...

MumOf2
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MumOf2

Deleted - duplicated post!

twhitehead

May be a different question but I think you can give someone £3000 each year to take that out of inheritance tax. What I am not sure about is could I give someone £6000 now because I didn’t give them £3000 in the previous tax year. Or am I posting in the wrong place???