IHT403 - calculating gifts out of income

aroominyork

I am co-executor for my father's estate. My parents used a solicitor who did not, to put it mildly, fill us with confidence after my mother died.

For my father's estate we are looking at whether lifetime gifts can be treated as exempt from IHT as gifts out of income. On page 8 of IHT403 the solicitor has included gifts as part of the Expenditure row 'Other' and left the row 'Gifts made' blank. So, for example, in 2018/19 my father had income of £127,796 and Expenditure of £120,969. £31,000 of the Expenditure total was gifts. The solicitor says £6,827 (£127,796 - £120,969) can be treated as Surplus.

It seems to me that since the non-gift expenditure was £120,969 - £31,000 = £89,969, he had £127,796 - £89,969 = £37,827 of surplus income which could be set against gifts.

Who is right please?

Marcon

aroominyork said:

I am co-executor for my father's estate. My parents used a solicitor who did not, to put it mildly, fill us with confidence after my mother died.

For my father's estate we are looking at whether lifetime gifts can be treated as exempt from IHT as gifts out of income. On page 8 of IHT403 the solicitor has included gifts as part of the Expenditure row 'Other' and left the row 'Gifts made' blank. So, for example, in 2018/19 my father had income of £127,796 and Expenditure of £120,969. £31,000 of the Expenditure total was gifts. The solicitor says £6,827 (£127,796 - £120,969) can be treated as Surplus.

It seems to me that since the non-gift expenditure was £120,969 - £31,000 = £89,969, he had £127,796 - £89,969 = £37,827 of surplus income which could be set against gifts.

Who is right please?

'Gifts out of income' has a particular meaning in the context of IHT. This might be a helpful read: https://www.pruadviser.co.uk/knowledge-literature/knowledge-library/normal-expenditure-out-of-income-exemption/

aroominyork

Marcon said:

aroominyork said:

I am co-executor for my father's estate. My parents used a solicitor who did not, to put it mildly, fill us with confidence after my mother died.

For my father's estate we are looking at whether lifetime gifts can be treated as exempt from IHT as gifts out of income. On page 8 of IHT403 the solicitor has included gifts as part of the Expenditure row 'Other' and left the row 'Gifts made' blank. So, for example, in 2018/19 my father had income of £127,796 and Expenditure of £120,969. £31,000 of the Expenditure total was gifts. The solicitor says £6,827 (£127,796 - £120,969) can be treated as Surplus.

It seems to me that since the non-gift expenditure was £120,969 - £31,000 = £89,969, he had £127,796 - £89,969 = £37,827 of surplus income which could be set against gifts.

Who is right please?

'Gifts out of income' has a particular meaning in the context of IHT. This might be a helpful read: https://www.pruadviser.co.uk/knowledge-literature/knowledge-library/normal-expenditure-out-of-income-exemption/

Thanks. The gifts meet those criteria, and since the solicitor says £6.8k is exempt he clearly thinks the gifts my father made were eligible if there was surplus income. So that brings me back to my question of whether the solicitor's calculation is correct?

Marcon

aroominyork said:

Marcon said:

aroominyork said:

I am co-executor for my father's estate. My parents used a solicitor who did not, to put it mildly, fill us with confidence after my mother died.

For my father's estate we are looking at whether lifetime gifts can be treated as exempt from IHT as gifts out of income. On page 8 of IHT403 the solicitor has included gifts as part of the Expenditure row 'Other' and left the row 'Gifts made' blank. So, for example, in 2018/19 my father had income of £127,796 and Expenditure of £120,969. £31,000 of the Expenditure total was gifts. The solicitor says £6,827 (£127,796 - £120,969) can be treated as Surplus.

It seems to me that since the non-gift expenditure was £120,969 - £31,000 = £89,969, he had £127,796 - £89,969 = £37,827 of surplus income which could be set against gifts.

Who is right please?

'Gifts out of income' has a particular meaning in the context of IHT. This might be a helpful read: https://www.pruadviser.co.uk/knowledge-literature/knowledge-library/normal-expenditure-out-of-income-exemption/

Thanks. The gifts meet those criteria, and since the solicitor says £6.8k is exempt he clearly thinks the gifts my father made were eligible if there was surplus income. So that brings me back to my question of whether the solicitor's calculation is correct?

I can't answer that without knowing the details, which presumably your solicitor has. The most helpful approach I can suggest is that you ask him to confirm why his calculation is correct and yours is not. If you try phrasing it as 'I've done the following calculation [include your reasoning here], and can't understand why I get a different answer from the one shown on page 8 of the form. Please could you explain where I'm going wrong in my thinking?' it'll avoid backing him into a corner and if he's wrong, it'll be easier for him to say so without a load of prevarication.

aroominyork

I've already written to him, not quite as diplomatically as you suggest. On page 1 he had ticked 'No' on whether gifts were made and whether we are claiming them as exempt. He since changed those. He (or his legal executive) omitted whole years on the income/expenditure page and also made six figure errors that we pointed out to him. 

getmore4less

Have all the gifts gone through the requirements to be considered for gift from income or other exemption?

Just having surplus income is not enough to qualify.

aroominyork

getmore4less said:

Have all the gifts gone through the requirements to be considered for gift from income or other exemption?

Just having surplus income is not enough to qualify.

I think they have, but will check.

Assuming they do qualify, has he populated the form (including gifts in 'other expenditure') incorrectly?

aroominyork

Is it correct that IHT is calculated on probate value and not on the cash-in value of investments? Since I understand that IHT is paid before probate is applied for, what happens if there is a large rise or fall in markets between when IHT is paid and when investments are cashed in, which would mean too much or too little IHT (based on probate values) was paid?

Keep_pedalling

aroominyork said:

Is it correct that IHT is calculated on probate value and not on the cash-in value of investments? Since I understand that IHT is paid before probate is applied for, what happens if there is a large rise or fall in markets between when IHT is paid and when investments are cashed in, which would mean too much or too little IHT (based on probate values) was paid?

If there is a large fall between the date of death and obtaining probate (at which point you can actually sell them) then you can reclaim some IHT paid provided the sale is completed within 12 months of the death.

if there is a gain then that gain will be subject to CGT.