Tax advise on specific questions of the IHT 400 form

crislauri

Hello, my father passed away 5 months ago and left a will and I am now dealing with probate.  I have filled all the required forms but would like to have a probate lawyer check the form before submitting to ascertain if there are additional ways to pay less tax than what I have learnt from different blogs, HMRC calls etc.  The probate lawyers we've spoken to are mostly interested in helping with the whole grant, but as we have already filled in all the forms we want to just be able to ask specific questions especially regarding the IHT 403 form.  

ZingyOcean

Most should offer an hourly rate for jumping on a Teams/Zoom call with you to go over your questions I would have thought? 

Which bit of the 403 did you have questions about? I've just done this form myself and it was a headache until I got my head round it. 

Remember you don't need to declare gifts made within the £3k yearly allowance or any gifts totalling £250 or less made to a person in a single tax year.  

The big things for this forms are going to gifts with reserved benefit (gifts with strings attached) made any time after 1986. 

You say 5 months ago - and that IHT is payable. Isn't interest due on the tax from 6 months after death as it's due by that point? so be mindful of interest adding up here.

Keep_pedalling

You could always start by asking the actual question here. Unless it is a complex estate most questions have straightforward answers.

crislauri

Thank you ZingyOcean and Keep-pedalling.  The main question on the 403 form is the gifts out of income and what can be included here.  My dad received  a lump sum from his pension 4 years ago and he paid for some of our education, fees etc from this lump sum, he did not have an income but had more than enough capital in the bank to be able to afford it.  However I am not sure if HMRC sees this as a gift out of income? 

ZingyOcean

Thank you ZingyOcean and Keep-pedalling.  The main question on the 403 form is the gifts out of income and what can be included here.  My dad received  a lump sum from his pension 4 years ago and he paid for some of our education, fees etc from this lump sum, he did not have an income but had more than enough capital in the bank to be able to afford it.  However I am not sure if HMRC sees this as a gift out of income? 

1 - What was the nature of the education were you 18 or under? I think there is an exemption for this. 

2 - Gifts out of income cannot be made out of capital:

"Regular gifts of surplus income

The normal expenditure out of income exemption allows the donor to make a series of IHT effective gifts from surplus income. There is no monetary limit to this exemption so the size of the exempt gift is only limited by the amount of the donor's surplus income. To qualify for the exemption, the gifts must:

• form part of normal expenditure (a regular pattern of gifting)
• be made out of income
• leave the donor with sufficient income to maintain their usual standard of living

Normal expenditure

The gifts must form part of a habitual pattern of gifting. This can be shown from the history of gifts actually made by the donor. Alternatively, where there is no such history, the exemption may still be claimed where it can be shown that the donor had made a commitment to future gifting.

There is no defined period for the length or the pattern of gifting in order to satisfy the condition. For example, a commitment to pay regular premiums to a life assurance contract could be satisfied merely by paying the first premium. Where the commitment is less clear cut, HMRC will typically look at a period of three to four years to establish a regular pattern of gifting.

Gifts do not have to be made to the same recipient every year provided they are paid to recipients within the same class, for example children or grandchildren. The amount of the gifts will typically be of comparable size but where an exceptional gift is made, the exemption may still apply up to the value of the previous gifts, with the excess falling outside of the exemption.

Income

Gifts must be made from current net income and not capital. Income for the purposes of the exemption does not follow what is defined as income for income tax. Instead it follows the normal accountancy rules. This is broadly income received from employment or pension, the natural yield from investments such as interest or dividends (not accumulated income) and income derived from assets such as rental income.

Certain income which isn’t subject to income tax, such as income from ISAs, may still be covered by the exemption. Also pension drawdown withdrawals which may include an element of tax free cash are also treated as income. It still must satisfy the other conditions to qualify. For example, stripping out all the tax free cash and gifting it over a couple of tax years is likely to fail to establish a regular pattern of gifting. However, giving away flexi-access drawdown which includes withdrawals which are 25% tax free cash and 75% taxable income over a period of say 10 years would satisfy the exemption.

Some examples of allowable income include:

• salary
• self employed earnings
• dividends
• savings interest
• pension annuities and income from defined benefit schemes
• regular withdrawals from flexible pensions, including any tax free cash element
• ISA income
• rental income
• trust income

HMRC deem that withdrawals from investment bonds are capital in nature even though any gains are subject to income tax through the chargeable events legislation. Consequently bond withdrawals cannot be used to increase the amount of surplus income which can be given away.

Usual standard of living

After making gifts, the donor should be left with enough income to maintain their usual standard of living. If they have to resort to capital to maintain their lifestyle the exemption may be lost or limited.

The usual standard of living will generally be the standard at the time of making the gift. However, where unexpected circumstances cause a change to their standard of living, for example, unemployment or a sudden requirement for residential care, the exemption may not be lost even if they do have to make future gifts from capital. Also, where unexpected circumstances mean that changes in the donor's standard of living provide increased surplus income, this too may be gifted using the exemption."

Source: Techzone Adviserzone (I'm not allowed to paste the direct link to the page here due to forum rules)

Keep_pedalling

A pension lump sum will be treated as capital not income, which is why it is not taxable.

The big question is what education did he pay for. Paying for your own child to go to a private school is expenditure, paying for a grandchild to do the same is a gift as is paying for an adult child to do a do a degree in later life.