Gifts out of normal expenditure - how far can you push it?

brianlawson

My Great Aunt has the following situation:
- Net assets (estate) well in excess of NRB
- After tax income of approx £50,000 pa (pensions, ISA dividends)
- She gives away £3,000 pa to use her IHT PET annual exemption every year and £5,000 pa to charities
- Her 'normal expenditure' (excluding the £8,000 pa gifts) is approx £25,000 pa
My questions are:
1. For the purposes of calculating 'normal expenditure', will HMRC include the gifts? ie will they consider her 'normal expenditure' to be £25,000 or £33,000 pa?
2. Assuming for the sake of argument the answer to 1. is £33,000, that would leave £17,000 pa of income that she could gift away without affecting her normal standard of living. If, therefore, she gave an additional (say) £12,000 away every year, would HMRC be satisfied that this additional gift complies with the conditions for 'gifts made as part of normal expenditure out of income' and hence exempt?
Thanks.

xylophone

She gives away £3,000 pa to use her IHT PET annual exemption 

The £3000 is not a PET exemption.

A PET is a gift/gifts in excess of the gift exemption see https://www.gov.uk/inheritance-tax/gifts

Re gifts out of income see  this very comprehensive explanation.

https://www.pruadviser.co.uk/knowledge-literature/knowledge-library/normal-expenditure-out-of-income-exemption/?icid=banner_articles#:~:text=vary%20in%20amount.-,Gifts%20made%20out%20of%20income,intention%20of%20making%20the%20gift.

Your aunt would need to look at her after tax income and calculate how much of that was required to enable her to finance her normal standard of living.

She will need to keep meticulous records to save her executor a headache.

Grumpy_chap

If she just give away £12k a year as one off that may look odd.  If she spreads the £12k across multiple birthday / Christmas gifts, wedding anniversaries, exam results, house warming etc that will look more like normal expenditure.  It may mean not everyone gets exactly the same amount, but that is probably normal.

Jeremy535897

See https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm14241 et seq.

getmore4less

Gifts from income just stop the estate getting bigger they do not solve an existing IHT liability. 

If already in IHT then look at ways to fix that.

If plenty of income large gifts to get the 7 year clock moving is often better unless all tied up in illiquid assets. 

can always top up with some of the surplus income.

Any transferable nil rate bands or eligible direct decendants to get a larger NRB. 

brianlawson

Thanks xylophone and Jeremy535897 for those very helpful links

Grumpy_chap

Another consideration is deprivation of assets in case of future care needs.  I think it reasonable to consider that any gifts from income are not deprivation of assets (as income is not assets).  Just my thoughts, though, not sure what the expert view would be.

getmore4less

Grumpy_chap said:

Another consideration is deprivation of assets in case of future care needs.  I think it reasonable to consider that any gifts from income are not deprivation of assets (as income is not assets).  Just my thoughts, though, not sure what the expert view would be.

A key measure for deprivation is are you leaving yourself deprived and is the reason to get benefits.

With significant asset the primary reason can easily be I have too much and I want to reduce my estates IHT liability

I still have £50k a year coming in and a few £100k left that should be enough.

Jeremy535897

Grumpy_chap said:

Another consideration is deprivation of assets in case of future care needs.  I think it reasonable to consider that any gifts from income are not deprivation of assets (as income is not assets).  Just my thoughts, though, not sure what the expert view would be.

If you are trying to get your estate below £23,250, the cut off amount for free social care, I doubt inheritance tax is an issue!

Linton

Gifts from income is ill-defined in the rules and so case law and knowledge of standard HMRC practice may be important if you are going close to the wire. The key point is that you must be able to make the gift entirely from your income whilst maintaining your normal standard of living and the gifts should be part of your normal expenditure - ie a large unusual one-off payment may attract attention.

One significant case concerned a lady who completed her personal accounts at the end of each tax year and gifted whatever income was unused.  HMRC objected, perhaps because the amount of money would be variable, but the courts concluded that as this was her normal practice it met the requirements of the law. However you probably dont want to have the opportunity to form a textbook legal precedent.

There is some carry over of excess income  - HMRC regard income as savings only after 2 years.  This can be very useful.

brianlawson

Thanks once again for the helpful comments. One of the keys seems to be the need for the gifts to be part of normal pattern of expenditure. This creates a challenge for the first few years, until the pattern has been established. If the donor is planning to gift away excess income to (say) grandchildren, I think I will have her write a letter to her grandchildren stating her intention to give away approx £x on the occasion of birthdays and Christmas so if she were to die before the pattern was established the letter can be used as evidence of her intention. x will be calculated to be less than, but not too much less than, her excess income after normal expenditure. Additionally, she will give away £3,000 pa. to use the exemption. Whether the £3,000 pa would then count as normal expenditure I suppose is a tricky one.