Gifts out of income - how far back can you go?

Robert_McGeddon

davidwalters said:

I'm trying to see if it's ok to take more than what we have already taken, from 2-3 previous years, since I've worked out there was more 'surplus income' available. That's all. I suspect it is indeed time-limited.

Your difficulty may be that income does not remain income forever. It gets reinvested, remains in a bank account etc. and both of these generate further income. At some point it magically turns into capital as far as gifting out of income is concerned. I have seen an online article (don't have a link) suggesting HMRC will accept going back 2 years.  If you have HMRC agreement to go back 3 year then you're doing well.

A practical point. If the amounts are large and/or you're being gifted a high percentage of the available excess this may attract the attention of HMRC when the probate return is eventually made. It may be worth thinking about extracting a lower percentage to avoid this and also give you a bit of headroom if some of the numbers are questioned.

davidwalters

Yes good point re. not going too high. I am onto that, and IF we can't go back the 3 years we have been doing this, then that particular year is well in excess of the possible excess income, meaning far less was taken than was available.

Jeremy535897

This gives some guidance:
https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm14250
https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm14251

Grumpy_chap

davidwalters said:

She wants to give all excess income, to reduce IHT.

Is her estate actually going to be liable for IHT?

davidwalters said:

It is for her best interests in that should she require to use more income herself, then we adjust the 'excess' accordingly. She lives very well, and is lucky to have a massive pension.

You making the decision that your mother gives her money away to you (which seems to be what you are describing) will always be open to challenge.
You avoided, so far as I can tell, answering whether you are acting under PoA.
Will your mother ever need funds for care purposes?

davidwalters

Grumpy_chap said:

davidwalters said:

She wants to give all excess income, to reduce IHT.

Is her estate actually going to be liable for IHT?

davidwalters said:

It is for her best interests in that should she require to use more income herself, then we adjust the 'excess' accordingly. She lives very well, and is lucky to have a massive pension.

You making the decision that your mother gives her money away to you (which seems to be what you are describing) will always be open to challenge.
You avoided, so far as I can tell, answering whether you are acting under PoA.
Will your mother ever need funds for care purposes?

You seem to be turning this against me! All I've asked is a question about how back we can go!! Yes, in certain matters I am POA. Not avoiding saying this; it just isn't relevant to my question.  BUT, like I said, SHE wants to do this, and signed a letter 4 years ago to this effect. AND, like I said, she has a massive pension, AND lots of cash for if and when she needs care, which will last her many years in a care home. She is 91 now.

davidwalters

Grumpy_chap said:

davidwalters said:

She wants to give all excess income, to reduce IHT.

Is her estate actually going to be liable for IHT?

davidwalters said:

It is for her best interests in that should she require to use more income herself, then we adjust the 'excess' accordingly. She lives very well, and is lucky to have a massive pension.

You making the decision that your mother gives her money away to you (which seems to be what you are describing) will always be open to challenge.
You avoided, so far as I can tell, answering whether you are acting under PoA.
Will your mother ever need funds for care purposes?

Yes, currently she will be liable to some IHT on her estate. 7 year rule is almost up on a huge amount, and 3 years into another amount, but until then, all ways of mitigating have been taken. Personally, like many, I - and she -  strongly object to money that was hard-earned by my father, was taxed at 40% then, should be taxed again at 40%. So yes, all ways to avoid it have - and will - be taken.

davidwalters

Jeremy535897 said:

This gives some guidance:
https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm14250
https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm14251

Thanks. Yes, I've looked, and rung, but no definitive answer! 'Suitable vague' which HMRC would no doubt use to their benefit if 'necessary'.

Voyager2002

davidwalters said:

Yes, currently she will be liable to some IHT on her estate. 7 year rule is almost up on a huge amount, and 3 years into another amount, but until then, all ways of mitigating have been taken. Personally, like many, I - and she -  strongly object to money that was hard-earned by my father, was taxed at 40% then, should be taxed again at 40%. So yes, all ways to avoid it have - and will - be taken.

You have the right to mitigate tax in all legal ways, and no-one could blame you for exercising that right. However, your comments about the tax system are unfortunate, and sound like an attempt to justify criminal ways of evading tax. Remember that the country as a whole is in trouble and if everyone paid their fair share of tax we would be well on the way to solving our problems. Remember also that your father's high income was mainly a matter of luck and was made possible by the hard work of others earning much less and by the facilities provided by the government and paid for out of general taxation.

Linton

For "gifts from income", Income becomes capital after 2 years.

See https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm14250

You should initially look at the income of the year in which gifts were made to see if there was enough income available to make the gifts, before considering earlier years. Income from earlier years does not retain its character as income indefinitely. At some point it becomes capital but there are no hard and fast rules about when this point is. If there is no evidence to the contrary, we consider that income becomes capital after a period of two years. Evidence to the contrary could impact either way as income:

See the tax manual reference for further details.

Jeremy535897

Linton said:

For "gifts from income", Income becomes capital after 2 years.

See https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm14250

You should initially look at the income of the year in which gifts were made to see if there was enough income available to make the gifts, before considering earlier years. Income from earlier years does not retain its character as income indefinitely. At some point it becomes capital but there are no hard and fast rules about when this point is. If there is no evidence to the contrary, we consider that income becomes capital after a period of two years. Evidence to the contrary could impact either way as income:

See the tax manual reference for further details.

I already referenced this. The bottom line is this. OP, by all means ask mother to maximise the gifts that you think you have an argument for. The worst that can happen is that you lose, and mother's estate pays the inheritance tax that would be due anyway (although I suppose HMRC might look more closely at all the arrangements). If she lives for seven years after the gifts, it doesn't matter anyway.