Inheritance Tax - Gifts from Income and Small Gifts exemption

cashcoward

As my wife and I get older and expect to be hit by IHT, I have been setting out to maximise the amounts I can legitimately give to our family within the IHT gift exemptions. I have made full use of the Annual Exemptions (£3,000 per donor pa) and Small Gift exemptions (£250 to any number of individuals pa) plus, when appropriate, wedding gift exemptions.

However, in the past couple of years, I have started also to use the Gifts from Excess Income exemption and it is here that I could use advice. I am aware that the Small Gift exemption cannot be used for a recipient who has also received one of the other exempt gifts (Annual Exemption, Wedding exemption) but would like to be sure whether or not it can be used for someone who receives Regular Gifts from Excess Income.

I spoke to Money Which about this and received the opinion that they COULD be used together as only the £250 is a transfer of capital. While that is the answer I wanted, I am not entirely convinced it is true and I cannot find anything in writing which is specific about this combination. As a letter to HMRC requesting clarification was ignored, I’m wondering if any Forum members can comment?

[Deleted User]

Are you expecting to die within the next 7 years? If not, then IHT isn't an issue and you can give as much as you want. If you do die within 7 years, then IHT will simply be payable by your estate at the time.

The only other consideration is deprivation of assets.

Jeremy535897

The answer lies in the wording of section 20 IHTA 1984 (small gifts):

Transfers of value made by a transferor in any one year by outright gifts to any one person are exempt if the values transferred by them (calculated as values on which no tax is chargeable) do not exceed £250.

Gifts that fall within the annual exemption (section 19) and gifts exempted as normal expenditure out of income (section 21) are still transfers of value, as are wedding gifts. So if you give Mary £20 a month as normal expenditure out of income, you have only £10 left of the small gifts exemption in respect of her.

Keep_pedalling

How big is your joint new worth, do you have children or grandchildren you plan to leave the bulk of your estate to?

If you have children then you are not going to have to worry about IHT unless between you, you will have over a £1M in assets.

One of the best ways of reducing potential IHT is to actually spend some of your hard earned enjoying yourself. Seems pointless building up your wealth and leave it all for someone ease to spend.

cashcoward

Thanks Jeremy535897 for that reference back to the Valuation Office's Technical Manual which seems SO clear that it ought to be the final word on the matter.  (And I think I'm likely to accept it as such).
However, it appears to be contradicted (or, at least, confused) by this quote from https://www.gov.uk/inheritance-tax/gifts "How Inheritance Tax works: thresholds, rules and allowances:  

Small gift allowance

You can give as many gifts of up to £250 per person as you want each tax year, as long as you have not used another allowance on the same person.

Birthday or Christmas gifts you give from your regular income are exempt from Inheritance Tax."

PennyForThem_2

You might want to check this out:

https://www.mercerhole.co.uk/wp-content/uploads/2019/07/bn_Gifts-out-of-income.pdf

Also there is an IHT Form that documents your income and expenditure which can be filled in to prove you have the necessary surplus income.  

There was a thread on Deaths forum ages ago where this question was raised - parents regular standing order to a child - this was when this form was completed as proof that the surplus income could support the reular expenditure.

PennyForThem_2

This is another source from a Wealth Management Company which prob is more up-to-date:
https://www.tilney.co.uk/news/how-do-i-make-regular-financial-gifts-from-surplus-income

Jeremy535897

My reference is not to a manual, but the legislation itself. The point is that for the £250 exemption to apply, the value transferred to the donee in the tax year must not exceed £250. There can be one gift or many, but once the aggregate value transferred hits £250.01, the exemption is lost in respect of that donee. It doesn't matter if the balance of the gifts is covered by another exemption.

What you quote is guidance, and the reference to Christmas and birthday presents is merely an example of gifts of normal expenditure out of income. In my opinion it is misleading to mention it in the same paragraph as the small gifts exemption.

cashcoward

Thanks PennyForThem_2 for those two links.  Both are good descriptions of the Gifts from Excess Income conditions but, unfortunately, neither addresses the question of interaction with other types of gift (specifically, Small Gifts).With regard to form IHT403, I have completed this for the past 7 years and intend to update it on a yearly basis.

Keep_pedalling said:

Seems pointless building up your wealth and leave it all for someone ease to spend.

In fact, my initial reason for building assets was against the possibility of my wife or myself requiring long-term care as I did not (and don't) trust the government to fund this.  So, it remains a possibility that a significant part of our assets could still be required for that purpose and, if not, I have no objection to my children/grandchildren/great-grandchildren benefitting from our assets.  In fact, I don't even grudge the Government a proportion of them but what I really DO object to, is paying 40% tax on assets which have been substantially accumulated out of income already taxed at up to 40%.

cashcoward

As there don't seem to be any further forum members commenting, I want to thank those who did for their inputs.  Particular thanks to Jeremy535897 who, for me, nailed it with his killer quote from the Inheritance Tax Act. 
Conclusion: You CANNOT use the Small Gifts exemption in addition to Regular Gifts from Excess Income exceeding £250.
Result: MSE Forum members (free) 1 - 0 Money Which Helpline (paid for).

Keep_pedalling

cashcoward said:

Thanks PennyForThem_2 for those two links.  Both are good descriptions of the Gifts from Excess Income conditions but, unfortunately, neither addresses the question of interaction with other types of gift (specifically, Small Gifts).With regard to form IHT403, I have completed this for the past 7 years and intend to update it on a yearly basis.

Keep_pedalling said:

Seems pointless building up your wealth and leave it all for someone ease to spend.

In fact, my initial reason for building assets was against the possibility of my wife or myself requiring long-term care as I did not (and don't) trust the government to fund this.  So, it remains a possibility that a significant part of our assets could still be required for that purpose and, if not, I have no objection to my children/grandchildren/great-grandchildren benefitting from our assets.  In fact, I don't even grudge the Government a proportion of them but what I really DO object to, is paying 40% tax on assets which have been substantially accumulated out of income already taxed at up to 40%.

We have done the same thing, regarding care costs, no way do we want to risk having to rely on LA supplied care, and we would want live in carers if possible which does not come cheap and is never going to be offered. If we never need it then the tax man will get 40%, and the kids still get a hefty bonus on top of their £1M tax free which is acceptable to us. 

We don’t have excess income as we spend well above our income, but we do continue to make gifts. Our annual allowances goes to our two children, and we do use make use of the £250 allowance to give to our SIL, DIL and to top up the GCs JISAs. 

To cover early PETs against an early death we took out term insurance which would cover any IHT to be paid on previous substantial pets.