Rules for applying allowances and sources of funding to gifts

cheekymonkeytoo

My kids have needed lots of support over the years, big and small.  I have prepared a schedule of gifts covering the past 7+ years, to maintain going forward. 

I am now assessing what gifts would (in hindsight) have been sourced from surplus income or otherwise capital, and also applying the annual allowances - and therefore what the 7 year rule currently applies to as a result.

Can someone clarify for me (as I cant find the answers). 

1.     Must I always first apply the £3,000 gift allowance to any gifts in a given tax year, before considering whether the rest was sourced from income or capital.  Assuming I had sufficient incoem to cover the gifts this year, could I just choose to carry forward the full allowance to the next year (where I know in hindsight it would have reduced capital gifts).

2.     If in a tax year I gifted £5,000 firstly to one son, and £20,000 later to another, and had £8,000 surplus income in that year - can I elect that the £5,000 came from income and £20,000 came from capital (from which I may deduct the £6,000 allowance brought forward from 1, and possibly the extra £3k surplus income too). 

Am sure this made sense to ask this when I started working on how it looks on my gift schedule - and trying to reduce the £ caught in the 7 year period.  Thanks

getmore4less

You are missing a key component of gifts from income.

Regular.

 There needs to be a pattern or an intent of a pattern.

cheekymonkeytoo

Thanks. I was just including a made up example.  In my situation there has been a regular pattern of payments for a variety of purposes over the years. Certain amounts have a uniform regularity to them, additional ones fluctuate, which I believe is fine. I will check over the key components again too.   The questions Im still unsure about.

Keep_pedalling

cheekymonkeytoo said:

Thanks. I was just including a made up example.  In my situation there has been a regular pattern of payments for a variety of purposes over the years. Certain amounts have a uniform regularity to them, additional ones fluctuate, which I believe is fine. I will check over the key components again too.   The questions Im still unsure about.

Your £3000 annual exemption is separate from the gifts from excess income and the former can come from capital so claiming it does not reduce your excess income.

if you look at form IHT 403 you will see your executor does not need to declare the annual exemption just the failed PETs and gifts from excess income.

If you give away £25k in one year where you have excess income of £8k you would effectively need to record £8k I’ve gifts from income (alongside a breakdown of income and expenditure) plus £14k in PETs (potentially exempt transfers). It would make sense to make any larger PET gifts as early in the financial year as possible to start the 7 year clock as early as possible but apart from that it does not matter how you allocate the other gifts.

getmore4less

Excess income is not per tax year eg. something like a rolling 2 years would be acceptable if that fitted the pattern.

cheekymonkeytoo

Thanks for you comments Keep-pedaling, and from others.  So so helpful/

Of course preparing an I&E schedule restrospectively is straightforward for income, but expenses less so (especially if an Executor has to prepare it).  HMRC presumably recognise this and reasonable estimates (eg for holidays, travel etc) are not unexpected.  Also if the gifts are not an excessive proportion in £ of the surplus that will be fine.

Last question sorry

I have assumed that all gifts are paid 50/50 between my wife and I and we both get £3,000 allowance.  We have a joint bank account.  I am the main earner, she earns little income.  Practically she shares 50/50 of my earnings, and the expenses - but for IHT403 do I just have to show my earned income, and all the expenses regardless.  Her IHT403 would then not be able to show any gifts from income.

Sounds like Im over thinking now, and perhaps its straight forward an answer. 

Keep_pedalling

cheekymonkeytoo said:

Thanks for you comments Keep-pedaling, and from others.  So so helpful/

Of course preparing an I&E schedule restrospectively is straightforward for income, but expenses less so (especially if an Executor has to prepare it).  HMRC presumably recognise this and reasonable estimates (eg for holidays, travel etc) are not unexpected.  Also if the gifts are not an excessive proportion in £ of the surplus that will be fine.

Last question sorry

I have assumed that all gifts are paid 50/50 between my wife and I and we both get £3,000 allowance.  We have a joint bank account.  I am the main earner, she earns little income.  Practically she shares 50/50 of my earnings, and the expenses - but for IHT403 do I just have to show my earned income, and all the expenses regardless.  Her IHT403 would then not be able to show any gifts from income.

Sounds like Im over thinking now, and perhaps its straight forward an answer. 

It becomes bit tricky apportioning expenditure where you have very different levels of income, it sounds like you are the only one with excess income so it can only be claimed on your estate.

This is something you should not leave to your executors if it is part of your IHT planning then you should keep good records that are available to then. 

cheekymonkeytoo

Agree entirely.  It may sound odd to some people but I have documented our Estate in XL (which I will update), and am linking these to IHT (and probate) forms set up on XL too - which with documentation should help Executors.  Never know whats around the corner.  Anyhow I feel its the correct thing to do at my age.

The gift schedule is long, given a constant stream of support to kids over the years, and mostly bit here and bit there every month, when they have struggled due to circumstance + larger amounts to help their future.  In truth this has caused me more time.  I cant people maintaining detailed records of every single small amount gifted like Im trying to do.  Perhaps Im being excessive.

Reference your reply, effectively I had anticipated that rather like the joint bank account, all our income and expenses would be shared 50/50 when it comes to IHT430 as we each give half the gifts (as would capital savings - mostly).  That not being the case it seems apart from £3,000 allowance for some gifts, the rest of gifts need to go through my own IHT403.

Keep_pedalling, I appreciate your patience with me and take everything youve said on board.  Thank you

cheekymonkeytoo

Keep_Pedalling, something you mentioned earlier regarding me being the major earner compared to my wife is stuck in my head.  Thinking this through: 

Assuming we give our children a £6k gift from our joint bank account, does this mean I cannot use the assumption that 50% came from her, and neither can I apply her £3k annual allowance either.

Sorry to ask more, this use of joint income isnt seemingly straightforward. Certainly not being able to use two lots of allowances will not help.  Albeit assume I could gift my wife money to then pass to children but seems pointless (in theory), and presume have to record that too.

You must spend all youre time answering questions for people, see you are popular !!  Will try to shut up after this.

getmore4less

The capital allowances are ok as you can gift your wife as much as you like and she can gift it on..

 I cant people maintaining detailed records of every single small amount gifted like Im trying to do.  Perhaps Im being excessive.

The reality is we gift a lot more than we think, if you take the kids out for a meal that's a gift  buy someone a pint that's a gift etc.

Pragmatism says ignore a lot of the day to day stuff and smaller amounts treating them as just normal expenses.
(there are some exemptions eg it is recognised for example kids in education need support) 

I suspect in practice HMRC take a broader view of the income, expense, capital, savings etc.

if your asset base is at least static after accounting for capital gains then  living costs and gifts must be from income.

HMRC don't want to trawl trough 7 years of accounts any more than the rest of us.

cheekymonkeytoo

Gotya - apologies for mistypes earlier too.  Pramatic it is.