IHT - gift out of income

Ciprico

I hope I am not abusing the goodwill of the forum by asking too many questions, I guess I will find out....

If a parent makes a one off gift to a child out of income (and subsequently dies), other allowances aside, would that qualify as being exempt from IHT

Most references to this on the web talk about "regular" gifts out of income, as opposed to a "one off" gift.

Thanks is advance

[Deleted User]

See this thread - 

https://forums.moneysavingexpert.com/discussion/6361865/inheritance-tax-due-on-gifts-in-kind#latest

Ciprico

Hmm thanks... 

So paying 1k a month for a year as a gift is OK.... But giving 12k on December is not...

Seems irational

Jeremy535897

Who said tax had to be rational? If your taxable income is £110,000, you pay 60% tax on the top £10,000 of your income. If your income is £110 million, you pay 45% on the top £10,000 of your income.

The subject is very complex. For an in depth analysis of HMRC's views, see:
https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm14231 et seq.

Keep_pedalling

Ciprico said:

Hmm thanks... 

So paying 1k a month for a year as a gift is OK.... But giving 12k on December is not...

Seems irational

If your annual income exceeds your annual expenditure £12k then you can make the gift as a number of payments over the year or as a single payment it does not have to be a monthly payment. 

The crucial thing is it has to be excess income, you can’t buy all you food from savings then give the equivalent income away and claim it is exempt. If you do have excess income and plan to use it as part of your inheritance planning, then in order for your executor to claim it you need to keep good records of your income and expenditure otherwise it will be a nightmare for them. Have a look at HMRC form IHT 493 to see what info is required.

Albermarle

What about the situation where you have a choice on how much income you receive?
For example you could be retired and ticking along quite nicely with your current pension, but start deliberately taking more income than you need by taking income from another  DC pension pot, that otherwise you might have left alone.

Or still be working, with sufficient income to live off, but start taking pension income before you retire so you have excess income to give away, and potentially avoid IHT.

I would guess the answer is that you could do both of these things, but you would be paying more income tax, which would negate some/all of the advantage gained?

Keep_pedalling

Albermarle said:

What about the situation where you have a choice on how much income you receive?
For example you could be retired and ticking along quite nicely with your current pension, but start deliberately taking more income than you need by taking income from another  DC pension pot, that otherwise you might have left alone.

Or still be working, with sufficient income to live off, but start taking pension income before you retire so you have excess income to give away, and potentially avoid IHT.

I would guess the answer is that you could do both of these things, but you would be paying more income tax, which would negate some/all of the advantage gained?

You would also be drawing from a source that falls outside your estate so no IHT saved.

Albermarle

Yes good point relating to DC pension.

However in my second example, someone could still be working, and take a DB pension early. Pay 20% tax on it, but then say they have excess income, and gift regular sums for living expenses to someone else and potentially avoid 40% IHT.

In any case I think there are probably a few scenarios ( not necessarily from pensions) where income can be varied to make sure you have excess income. 

Keep_pedalling

Albermarle said:

Yes good point relating to DC pension.

However in my second example, someone could still be working, and take a DB pension early. Pay 20% tax on it, but then say they have excess income, and gift regular sums for living expenses to someone else and potentially avoid 40% IHT.

In any case I think there are probably a few scenarios ( not necessarily from pensions) where income can be varied to make sure you have excess income. 

Exactly how would you be able to vary you income to do this?

Albermarle

I have not thought it through in any detail, was just wondering how clearly one's exact income and what is the excess, can be defined. Sounds like a grey area and open to interpretation.

Keep_pedalling

Albermarle said:

I have not thought it through in any detail, was just wondering how clearly one's exact income and what is the excess, can be defined. Sounds like a grey area and open to interpretation.

Which is why HMRC want a good breakdown of income and expenditure.