IHT403 - Analysis of Income & Expenditure schedule

Keep_pedalling

When your children marry each parent has an exempt gift of £5000 to give so £10,000 in total. Regardless of who earned the money the money in your joint account is a joint asset so gifts from this account can be treated as joint. If your wife did not use her allowance last year that can be carried forward. 

Pensions do not normally form part of your estate, but obviously the house does. 

getmore4less

cheekymonkeytoo said:

Wifes income goes to her own bank account. Gifts all come from our joint account, for which I am sole income provider.  Can I still use her allowance on that basis? 

One of 3 children married - we paid for 50% of honeymoon as a gift, plus 50% of wedding cost as joint hosts.  I havent treated 50% of wedding as a gift.  Does that work if I do?  Other two children are yet to show an opportunity.

Joint net worth is over £1m, but less than that excluding the house and occupational pension pots.  Wills are being redrawn so 100% of my net worth goes to wife (visa versa).  Surviver can then organise a deed of variation to give some of that inheritance to children etc, depending upon state of play.  

You are going to invoice me for consultancy soon I feel......

That just loses the spouse exemption and uses up nil rate band.

There is a case for doing that to use up nil rate band as potential new spouse could result in losing some transferable as max is 100%

Surprised IHT avoiding through  extra spouse exemption is not used more often.

cheekymonkeytoo

So just to clarify on wedding gifts - can I treat paying half the wedding (which saved my son couple from doing so) as a wedding gfit?  Brides parents paid same.

Thanks as always so much help here from you both

Robert_McGeddon

Keep_pedalling said:

I am afraid those big ticket items are classed as expenditure you can’t exclude them. If you look at box 22 on IHT403 it asks for surplus / deficit so some years your expenditure can exceed your income.

I don't think it's that clear cut. s21 ITA 1984 para 1(a) refers to " [an exempt transfer]. . . that it was made as part of the normal expenditure of the transferor, and"

What is "normal expenditure"?  Regular, recurring, expected, common etc? Buying a new car every 8-10 years doesn't meet those descriptors and to my mind is therefore not normal expenditure. Furthermore, if such a purchase of, say, £30K, was funded by a withdrawal of £30K from an ISA then I would consider it capital in nature and as the total value of my assets before and after the purchase was (essentially) unchanged the IHT on my estate is not affected by the purchase so why should there be an additional potential liability arising from gifting out of income?  I would apply the same logic to major capital expenditure such as replacing the roof.  Not so good for people who lease their vehicles!

The grey area persists further down the stack, though.  New carpets, appliances, laptops etc. are things that are replaced regularly and lose value on purchase so I consider them being purchased within recurring expenditure.  Where's the cut-off point? I don't have a view.

Linton

Robert_McGeddon said:

Keep_pedalling said:

I am afraid those big ticket items are classed as expenditure you can’t exclude them. If you look at box 22 on IHT403 it asks for surplus / deficit so some years your expenditure can exceed your income.

I don't think it's that clear cut. s21 ITA 1984 para 1(a) refers to " [an exempt transfer]. . . that it was made as part of the normal expenditure of the transferor, and"

What is "normal expenditure"?  Regular, recurring, expected, common etc? Buying a new car every 8-10 years doesn't meet those descriptors and to my mind is therefore not normal expenditure. Furthermore, if such a purchase of, say, £30K, was funded by a withdrawal of £30K from an ISA then I would consider it capital in nature and as the total value of my assets before and after the purchase was (essentially) unchanged the IHT on my estate is not affected by the purchase so why should there be an additional potential liability arising from gifting out of income?  I would apply the same logic to major capital expenditure such as replacing the roof.  Not so good for people who lease their vehicles!

The grey area persists further down the stack, though.  New carpets, appliances, laptops etc. are things that are replaced regularly and lose value on purchase so I consider them being purchased within recurring expenditure.  Where's the cut-off point? I don't have a view.

The law on gifts from Income is not clear cut and will only become so should cases ever come to the courts.  There was one case where the donor simply gifted all her unused income at the end of each tax year whatever that happened to be.  HMRC objected but the judge decided that since this was demonstrably her regular practice it satisfied the rules.

So I would say that if the deceased often paid for carpets, cars or whatever then it is reasonable to include the costs as gifts from income if their savings were not reduced.  HMRC can say no if they wish but almost certainly won't.  I believe they are really after the far more obvious cases of gifts being used purely for avoiding tax.

cheekymonkeytoo

Hi - I took it upon myself to speak with the HMRC IHT helpline this afternoon, and the lady was so helpful.  Got the sense that someone asking questions on the content of their own IHT403 (rather than an executor) helped lighten the moment lol.

Anyhow I said it is not clear what constitutes normal expenditure and gave the example of me buying a 'new' car - which for me is irregular, and by its nature (incl high cost) is paid out of savings accumulated over a number of years).   She went away and asked her technical team.

Upshot of response - IHT403 should comprise regular and normal type expenditure, and in my example a car would not fall into that category.  I also threw in a few more examples of irregular large spend (that tend not to recur often) such as home refurb (eg bathrooms, flooring), one off legal costs, and these examples were not questioned as being regular.  I didnt go through lots of examples as it was clear what was expected - with sensible discretion applied.

I also took away a perception (from an open and sensible conversation with her) the IHT team are pragmatic, know what looks odd from all the documentation (and detail of gifts pages).  As Linton said, finding the far more obvious cases of people trying to avoid tax will no doubt be higher on their agenda.    

I have lots of detail of income and expenses and the IHT403 summary - and now have a clearer view on surplus and gifts from income (outside of allowances) to maintain year on year, which executors would struggle to prepare.  Thanks from forum support to get me to here.

pysifr

There is nothing in this discussion, especially from "keep-pedalling", that "big ticket" one-off items have to be included. I read, "For the avoidance of doubt, expenditure will include income tax and all regular expenditure of an income nature (but not capital expenditure such as a home extension),https://www.mandg.com/wealth/adviser-services/tech-matters/iht-and-estate-planning/exemptions-and-relief/normal-expenditure-out-of-income#maintaining-a-normal-standard-of-living  This is the only thing I have seen in many many hours of research that addresses this issue. I would assume that this also covers things like buying a car every 5 -10 years, going on a one-off very expensive holiday, re-carpeting the house, paying for extensive flood damage the the insurance company hve wriggled out of. Quite clearly, these are not "normal" expenses, nor are they your "normal standard of living". 

pysifr

cheekymonkeytoo has the answer that I was trying to get from HMRC! These one-off purchases are not "normal expenditure"! I tried to get this in two phone calls to HMRC, and both times they refused to answer as this was seen as "tax avoidance". Well done Cheekymonkeytoo for finding a helpful HMRC employee