IHT 403 - Gifts made out of regular income

[Deleted User]

baby_boomer said:

The exact phrase used on IHT 403 is "Gifts made as part of normal expenditure out of income"

That is correct. It is the gifts that has to be regular, or normal, not the income.

Read particularly under the heading ‘Normal Expenditure’. 

https://www.taxadvisermagazine.com/article/normal-expenditure-out-income-exemption

baby_boomer

Thanks purdyoaten2 . This is a super helpful article :-) for anyone thinking of going down this route. It doesn't explicitly answer my own question but shows HMRC does pay close attention to definitions of income and capital.With that in mind I think I'll divert my ISA dicidends through my current account for the avoidance of any possible doubt that I am giving out of income. That also has the happy benefit of providing easy records for my executors - which the article strongly recommends. The potential loss of accumulated ISA income gains, which I had been looking to avoid should be more than made up by IHT savings for the family.

[Deleted User]

baby_boomer said:

Thanks purdyoaten2 . This is a super helpful article :-) for anyone thinking of going down this route. It doesn't explicitly answer my own question but shows HMRC does pay close attention to definitions of income and capital.With that in mind I think I'll divert my ISA dicidends through my current account for the avoidance of any possible doubt that I am giving out of income. That also has the happy benefit of providing easy records for my executors - which the article strongly recommends. The potential loss of accumulated ISA income gains, which I had been looking to avoid should be more than made up by IHT savings for the family.

The point that I was trying to make that the phrase it is the gift that has to be regular, not the income. A one off gift of £50000 out of ‘regular income’ (whatever that means) would not be appropriate. A gift of £5000 every Christmas out of income would.

Jeremy535897

Worth having a look at HMRC's IHT manual if you want to dig deeper. Re your ISA point, for example, see:
https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm14250

Which says:
"If a gift is made out of a current account you only need to check that the gift could have been made out of income. You do not need to match the gift to specific money in the account."

But if you reinvest the ISA dividends into shares, then that income will become capital at that point, or probably after two years if it just sits in the ISA account (unless already matched with a current account gift):
"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:

• may immediately be invested in a capital product and become capital or
• may be retained as income for more than two years with a specific purpose in mind.

Each case will depend on its own facts but, in general, the longer the period of accumulation, the more likely it is that the income has become capital. However, this is not the only factor to consider. You will also need to look at how the accumulation has been made and the transferor’s actions (or inaction) in accumulating it."

baby_boomer

You are a gem :-) .

ironmongem

Keep_pedalling said:

baby_boomer said:

I'm trying to reduce IHT by the "gifts out of regular income" route. Do I need all the income to go directly through my current account which deals with expenditure? Or can income remain outside e.g. in an ISA? 

Do you actually have excess income? It does not matter what account it goes through you just have to show that it is excess income by keeping good records on both income and expenditure otherwise it is going to be difficult for your executor to claim the exemption.

This exemption does not actually reduce your current IHT liability it just stops it growing through unspent income. If your estate is already in IHT territory you need to take other steps as well.

Assuming that you're making full use of the 'regular payments from income', am I correct in saying that you then can reduce your IHT liability by gifting tax free using the annual exemption and/or small gift allowance and/or wedding gift allowance? These gifts would come from your assets (money, shares, jewellery, etc) so each gift would reduce your IHT liability.

Jeremy535897

You have to look at the facts. It may well be that small cash gifts at birthdays are themselves "living expenses" that would reduce the available income for the normal expenditure out of income exemption, for example. Gifts of assets would be unlikely to do so.

J34

Some websites have confused us by saying that it is taxable income. It includes ISA income, see 403 box 20.

J34

I don't want to further confuse things but I have several questions about surplus income giving and would appreciate help.

If I exceed the £3000 gift allowance (which is likely) it seems that all my gifts have to be detailed in Box 7 of 403, which is extremely onerous for my executors, possibly requiring a few hundred entries. Will HMRC accept a condensed form or summaries e.g. for monthly gifts? I need to know what records I should keep. I phoned the HMRC helpline but didn't get any. I could easily die in the next 7 years.
In Box 7 there is no way of indicating whether a gift is out of surplus income or out of capital. Does HMRC just want the total (I think regular) gifts out of surplus income in Box 21? And it can matter if these include charitable ones or not. (All charitable gifts, even regular ones, could be out of capital and not taxed.)
Boxes 20 and 21 could also be extremely onerous for my executors. If I don't keep records my executors will have to trawl through thousands of transactions. And who will trust my records?
403 is a nightmare for the executors of those who have surplus income (and capital) and make numerous gifts. If the deceased dies unexpectedly there may only be bank statements.
Has anyone useful experience?

[Deleted User]

Is your estate likely to exceed £325000? 

What is your marital status?
Do you own a home?