IHT205 and Gifts From Income

jambojar

If you use form IHT205, there is no where to claim the Gifts Out Of Income exemption. It is assumed that as there's no tax to pay on the deceased's estate even without using that exemption, so there's no need to enter the details.

However, if the deceased has a spouse who subsequently dies, the spouse is allowed to claim the unused portion of the nil rate band from the first estate. So does the executor for the second estate then need to complete two IHT403 forms, one for each spouse, or is there somewhere else they should be entering the Gift Out Of Income details for the first estate?

WaywardDriver

IHT205 box 9.1 says "show the date and description of gifts, who they were made to and any exemptions you have deducted." So my understanding is gifts out of income would be entered here and the exemption is "out of income". 
Interested in more expert views.

jambojar

The notes for IHT205 box 9.1 specifically exclude you from using any substantial Gift Out Of Income exemptions to reduce the total: "Where the deceased made gifts out of income that exceed £3,000 per year, you must not deduct the exemption for the years concerned. The full value of the gift must be added to all the other gifts in box 9.1 to arrive at the total value for gifts."

Yes, you can still list the gifts and say they are out of income, but is that sufficient? (IHT403 would require you to give a lot more details about your income and expenditure for each year)

WaywardDriver

jambojar said:

Yes, you can still list the gifts and say they are out of income, but is that sufficient? (IHT403 would require you to give a lot more details about your income and expenditure for each year)

That's what confuses me as well. As you say IHT403 requires detailed income and expenditure figures for up to 7 years to justify the out of income exemption.

jambojar

Assuming the executor for the first estate does use IHT205, then the executor for the second estate can complete IHT402 ('Claim to transfer unused nil rate band'). This does let you declare that the Gifts Out Of Income exemption was used on the first estate, but again, it doesn't specifically ask for income and expenditure figures, or any other justification/proof that the exemption should be allowed.

Will the claim be allowed without any additional proof, or am I missing something?

WaywardDriver

Seems only the 2 of us in this discussion - was hoping for an expert view.
I'm interpreting the phrase "you must not deduct the exemption for the years concerned" to refer to the £3k annual allowance, so if £10k is gifted out of income then £10k is entered rather than £7k.
In preparation for my executors completing IHT403 for the 2nd estate, I'm using Excel to keep records of all transactions summed by the income and expenditure categories in boxes 20-21. These could be used to supply more detailed information for IHT205 for the 1st estate If necessary.

jambojar

From page 11 of the notes, my understanding is that it's the Gift  Out Of Income exemption that can't be used when calculating IHT205 Box 9.1. The Annual £3,000 Exemption is fine.

BTW, it's never clearly spelled out, but from Example 2 on that page of the notes, it appears that only one type of exemption can be applied to any one gift, so if you say it's a Gift Out Of Income, you can't then use the Annual Exemption on it as well.  Maybe I'm wrong though and it's just a misleading example.

WaywardDriver

Found this link https://www.taxationweb.co.uk/forum/iht205-iht206-t56238.html which includes the statement "The test is not about IHT exemption, it is whether the estate falls within the category that can use form IHT205 (rather than the fuller IHT400)."
So my understanding is I enter the value of all gifts within 7 years, without any deductions, into box 9.1 and follow the subsequent calculations to determine whether IHT400, with its full out of income calculations, is required. If 1st deceased leaves everything to surviving spouse then unlikely any IHT due and hence no need to justify gifts as out of income.

jambojar

Yep, as mentioned in my first post, I understand that so long as there's no tax to pay on the the death of the first deceased, there's no need to enter all the gift details at this stage so IHT205 is sufficient.

However, if the spouse subsequently dies and their estate needs to make use of the unused nil rate band from the first death, they will need to provide full details of the Gifts Out Of Income (presumably including income and expenses).

So my question is which form will be used to provide this information?

EasySolution

Question 2 on the front page of the IHT 205 provides your answer.

In the 7 years before they died, did the deceased: make any gifts or other transfers totalling more than £3,000 per year, other than normal birthday, festive, marriage or civil partnership gifts? No Yes or

give up the right to benefit from any assets held in trust that were treated as part of their estate for Inheritance Tax purposes? No Yes If you answered ‘Yes’ to either part of this question, include the chargeable value of the gifts in box 9.1. But if this value is more than £150,000 or the assets do not qualify as ‘specified transfers’, stop filling in this form. You will need to fill in form IHT400 ‘Inheritance Tax account’ instead.
You have to fill in the IHT 400 and appropriate Schedules.

WaywardDriver

EasySolution said:

... include the chargeable value of the gifts in box 9.1. But if this value is more than £150,000 or the assets do not qualify as ‘specified transfers’, stop filling in this form. You will need to fill in form IHT400 ‘Inheritance Tax account’ instead.

You have to fill in the IHT 400 and appropriate Schedules.

That's clear enough but in my case and I suspect the OP's, the gifts are <£150k and qualify as specified transfers (i.e. they're cash), so form IHT205 is sufficient in theory. I believe the OP is thinking ahead to the 2nd estate. 
For example, the 1st estate leaves assets of £300k and has made gifts of £100k. There's no IHT as everything is left to the surviving spouse. If the gifts qualify as out of income then the entire £325k allowance is unused and transfers to the 2nd estate; if not then 300+100-325 = £75k has been used and only £250k transfers. The OP's query is how to justify the £100k as out of income if only IHT205 is completed.
At least that's what I think the OP is getting at and would be an issue for me as well.
Maybe the 1st estate needs to use IHT403, even if no IHT due, to justify the out of income exemption.