Gifts out of regular income

Dilbert_Investor

I understand that regular gifts can be exempt from IHT if they are given as part of normal expenditure, made out of taxable income and don’t effect the givers usual standard out living.

I’ve a couple of questions which I would appreciate some help with; 

Is there a standard form of wording needed to document the arrangement so as to satisfy HRMC; and

Does the recipient need to declare this income and pay tax on it?

Many Thanks.

Stubod

I don't think gifts are classified as income and no tax is payable on gifts ....

https://www.gabyhardwicke.co.uk/briefing-notes/inheritance-tax-exemption-for-gifts-out-of-surplus-income/

From the above link:--

Practical Tips

• If you are intending to establish a pattern of giving as part of your normal expenditure out of income, we would recommend that you write a letter to the person or persons to whom you are making any gifts as a record of the gift and the letter should state your intention to establish a pattern of making further gifts out of surplus income to them in the future. This letter will then be useful evidence in establishing your intention, in the event that H M Revenue & Customs were ever to raise any queries after your death.
• Keep proper records of your income and expenditure, so that your executors are easily able to identify your surplus income in any one tax year. You may wish to print off a copy of H M Revenue & Customs inheritance tax schedule IHT403. The last page of that schedule deals with gifts as part of your normal expenditure out of income and has various headings for income and expenditure for you to keep records. You should also keep any supporting papers confirming your income or expenditure, in the event of any queries by H M Revenue & Customs.
• Keep a record of your income and expenditure for the two tax years prior to your first gift, as H M Revenue & Customs will usually accept that accumulated unused surplus income will only become capital after two years and you may, therefore, be able to make use of unused surplus income from a previous tax year. This can be particularly helpful for those whose income fluctuates significantly from one tax year to the next, such as people who receive royalty income.

• Don’t forget to include income from ISAs as part of your income, as well as attendance allowance payments, which will be considered as income, although not taxable.

Keep_pedalling

The important thing is that to qualify the gifts have to come out of excess income, so the gifted needs to keep records of both income and expenditure if they don’t want to leave their executors with the nightmare of trawling through 7 years of bank statement. With people switching accounts so much that may not even be possible. 

Have a look at page 8 of IHT403, that will tell you exactly what is required.

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/917890/IHT403-05-20.pdf

Gifts are not taxable and do not have to be declared.

Keep_pedalling

Another point regarding gifts for income is that it is a method of restricting the growth of an estate, so although it helps with avoiding the estate value increasing it does not help with reducing the size of an estate already in IHT territory, for that you need to spend more or gift more.

tightauldgit

If its a gift you just gift it, then IHT documentation would done in the event it's needed to be done.

There's no income tax to be paid on gifts. 

StevenH1966

I regularly downloaded my mother's bank statements into Excel.  I would then classify each line item (into more categories than are just on the IHT403 form) and an extra column for the tax year the item refers to. I would then filter these to get annual amounts for each classification - although PivotTables would be better but I'm not that good at Excel.

A standing order was set up to pay the 2 sons each quarter what we thought would be the excess income.  Some quarters it might be adjusted up or down depending upon how the excess was tracking, although you can carry forward 2 years of excess income which does help in smoothing the payment amounts.

For income I took the figures from self assessment tax returns and added ISA interest and attendance and winter fuel allowances.

Linton

Dilbert_Investor said:

I understand that regular gifts can be exempt from IHT if they are given as part of normal expenditure, made out of taxable income and don’t effect the givers usual standard out living.

I’ve a couple of questions which I would appreciate some help with; 

Is there a standard form of wording needed to document the arrangement so as to satisfy HRMC; and

Does the recipient need to declare this income and pay tax on it?

Many Thanks.

There is no standard wording to document a gift out of income.  The executor fills in the data requested on the IHT form.  If you are the donor it would assist the executor if you produced an annual list of gifts and summarised income and outgoings.   The executor can then check this against bank statements and demonstrate to HMRC that GOOI is appropriate.

See https://www.mandg.com/pru/adviser/en-gb/insights-events/insights-library/normal-expenditure-out-of-income-exemption?utm_source=legacyurls&utm_medium=301&utm_campaign=/knowledge-literature/knowledge-library/normal-expenditure-out-of-income-exemption/ for helpful information on gifts out of income.

The recipient does not declare the gift.  There is no personal taxation on gifts.  In theory a recipient could be liable for the inheritance tax on a gift if the estate cannot pay but if it is a genuine GOOI there is no tax due anyway.

davidwalters

Dilbert_Investor said:

I understand that regular gifts can be exempt from IHT if they are given as part of normal expenditure, made out of taxable income and don’t effect the givers usual standard out living.

I’ve a couple of questions which I would appreciate some help with; 

Is there a standard form of wording needed to document the arrangement so as to satisfy HRMC; and

Does the recipient need to declare this income and pay tax on it?

Many Thanks.

My research, and practice, has found no standard form, but the letter, signed by the giver, should say they want it to happen, starting from whenever. Recipient does not need to declare it; gifts are non-taxable by the recipient, and the giver, if out of excess income, does not need to declare it but should keep a record to show it does come out of excess income.

Keep_pedalling

davidwalters said:

Dilbert_Investor said:

I understand that regular gifts can be exempt from IHT if they are given as part of normal expenditure, made out of taxable income and don’t effect the givers usual standard out living.

I’ve a couple of questions which I would appreciate some help with; 

Is there a standard form of wording needed to document the arrangement so as to satisfy HRMC; and

Does the recipient need to declare this income and pay tax on it?

Many Thanks.

My research, and practice, has found no standard form, but the letter, signed by the giver, should say they want it to happen, starting from whenever. Recipient does not need to declare it; gifts are non-taxable by the recipient, and the giver, if out of excess income, does not need to declare it but should keep a record to show it does come out of excess income.

Anyone making such gifts would be wise to print off page 8 of IHT 403 and use that as a basis to record expenditure and income, which will make life easier for their executors.