What is meant by "gifts out of income" and "normal expenditure" in the IHT context?

Cam6265

The IHT400 Guidance Notes explain that one can claim on Form IHT403 an exemption from IHT on gifts made out of income which are normal expenditure. Can anyone advise on how these are defined?

Aside from any general clarification, I have two specific questions:
Q1. I have investments in a number of ISAs which I draw upon each year to supplement my other sources of income by selling c£10,000 each year. Does this count as income?
Q2. One of my daughters is a single mum with two children. I have been providing financial support to her of c£1,000 per month for several years. Does this count as normal expenditure - and therefore not liable to IHT?

I am hoping to live a good few years yet, so IHT related to these issues may not arise. But I would like to take any advisable precautionary steps just in case.

Keep_pedalling

Selling equites is not classed as income so it does not seem that you you have that much excess income.

What  is your current net worth and your marital status? If you are single then you may be able to leave up to £500k IHT free, double that if you are widowed.

Jeremy535897

It's a complex area, covered in the IHT manual quite well, starting at:
https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm14231

In answer to your questions:
Q1: No
Q2: that is normal expenditure, but you have to have sufficient surplus income to cover it.

Cam6265

Thanks Keep_pedalling. Our joint estate will exceed £1m so we will use up our NRBs.
Re Q1 and Q2, we tend to sell some ISA shares when we want to fund some "non normal expenditure" for ourselves - such as a new car or a new bathroom. So our "normal expenditure" including support to our daughter can be met by our "normal income". There does seem to be a lot of grey areas here and room for interpretation of what "normal" means. 

Cam6265

Thanks for the reference Jeremy535897 - I will study it carefully, but not today!

Albermarle

Cam6265 said:

Thanks Keep_pedalling. Our joint estate will exceed £1m so we will use up our NRBs.
Re Q1 and Q2, we tend to sell some ISA shares when we want to fund some "non normal expenditure" for ourselves - such as a new car or a new bathroom. So our "normal expenditure" including support to our daughter can be met by our "normal income". There does seem to be a lot of grey areas here and room for interpretation of what "normal" means. 

You are right there are a lot of grey areas, also about what counts as gifts. Like paying for your daughter and two children to go on holiday with you ( as one example).

MarzipanCrumble

Look at page 8 of the IHT403 Form:
https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/917890/IHT403-05-20.pdf

Although I don't give regular amounts (say, monthly) out of income I fill in this part of the form transferred to an Excel spreadsheet to show that I have excess income over expensiture, and therefore could, without unduly affecting my standard of living.

I also find it a helpful exercise to check my spending.

Cam6265

Jeremy535897 said that it's a complex area, covered in the IHT manual quite well, starting at:
https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm14231

I've now read these sections of the manual and can see the fuzziness more clearly! Interesting to read that "income" is not defined in the relevant legislation IHTA84 and that it required a judge to come up with this less-than-clear definition of what is "normal" income:

"What is necessary and sufficient is that the evidence should manifest the substantial conformity of each payment with an established pattern of expenditure by the individual concerned - a pattern established by proof of the existence of a prior commitment or resolution or by reference only to a sequence of payments".

As a numerate professional who keeps good financial records, I would struggle today myself to provide all the documents and evidence that the IHT manual requires. What chance would my executors and/or their professional advisors have to do so when I am no longer around? At least I now know what advice to give my kids when they have to sort things out!

Grumpy_chap

Albermarle said:

what counts as gifts. Like paying for your daughter and two children to go on holiday with you ( as one example).

It all depends on family relationships but I can imagine there are many cases where paying for the daughter and grandchildren to have a holiday is far from considered a gift by the daughter and the grandchildren.
It is quite conceivable that such a week every year is really for the benefit of the eldest generation, tolerated by the daughter (because it "takes care" of one of the weeks in the long school holiday) and "enjoyed" by the grandchildren because they have been instructed to behave and enjoy themselves as it makes the grandparents happy.
The difference in energy and what counts as good fun can be vastly different between grandparents and grandchildren.

MarzipanCrumble

I wouldn't consider that as a gift either (though thinking about it, it is).  Oh well, if I do it will record it.

joesoap1264

I am looking into IT at the moment, and am interested in this subject of excess income.
my wife and I have c£650k in bank a/cs, fixed rates, isas,all cash.
no shares any more.
I have given at least £100k away to kids in last 7 years.
got junior isa for GGrandson.£25k
Our income with pensions Is approx £50k PA.
bank interest on top , could now be £20-£30k PA.
so £1k a week +
I was looking at setting up standing orders for the 2 kids( 62-58) hardly kids, and to my GG’s Jisa instead of lump sums out of unused income.
I could see no problem with giving half my /our income , monthly / weekly away and still have enough to live off, it only goes into another bank a/c and amassing more towards IHT.
we don’t spend much now, got all we need .
I am now at the IHT level, house is circa £4-500k+ £650k in cash, = £mil.
house is going to the kids , to sell and split.
tried getting the kids to study the IHT forms before we go, but it’s like banging head agin a wall.
appreciate any advice, hints, etc, not paying for advice, it’s gratis on here and plenty of info around.
if I went via the excess income route, the bank statements would be proof of income, expenditure, gifts, all on monthly statements, and still cash to spare, which we could gift using 2x£3k gift allowances as lump sums.