Another gifting question

bouicca21

I use the £3,000 allowance each year.  Now that I have grandchildren I would like to make regular monthly payments to a savings/isa type account in their names so that they have something to splurge on when they are 18 (party, uni, travel, whatever they want). If that amount comes from income rather than savings, does it count towards the £3,000 limit or is it over and above because it comes from a current account rather than savings?

Malthusian

Regular gifts out of surplus income, that do not affect your standard of living, are immediately exempt from Inheritance Tax, without the need to survive seven years.

As long as that "income" is in excess of your current expenditure and the gifts are regular in nature, it sounds like they should be immediately outside your estate.

Whether the money comes from a current account or savings account does not necessarily matter. However if the money in the savings account has been sitting there a while, then it has probably become capital rather than income. The same is true for money that has been sitting in your current account or anywhere else for a while.

You should keep a record of your gifts along with income and expenditure. Good practice is to complete the IHT 403 form as if you were executing your own estate (page 8 is for regular gifts out of income), and update it every year.

And, of course, all of this only matters if your estate is actually big enough to have an Inheritance Tax liability.

Keep_pedalling

You can only claim exempt gifts from income if your income exceeds your expenditure, which for the benefit of your executors means you need to keep records of your annual expenditure as well as the gifts.

Its only worth going to these lengths is your estate is actually in IHT territory. We are doing something similar for our GC, but we added a larger sum when they were born and now add £500 each birthday (£250 each) which is covered by the small gift allowance. 

Sea_Shell

What constitutes excess "income"?

I'm assuming it doesn't include investment gains that aren't actual dividend payments (ACC units) either in ISA or pension.

You could have "gains" of many thousands, but only have "income" of much much less (eg that actually drawn out of pension), if you are also drawing on cash savings.

Should one move to INC units, if you wish to use this method?

Keep_pedalling

Dividends whether in ACC or INC funds is income but if you are planning on giving that income away it would be simpler to have it in an INC fund.

Growth in equity values falls under capital gains so does not fall under income. 

bouicca21

I have no idea what INC or ACC means. I live on a pension. I’ve always had to be frugal, and for the first time in my life I have money left over at the end of the month. 

I’m not sure if my estate will be liable to IHT - I live in a modest property but it is in London, and the property value hovers around the IHT threshold, currently probably more.   I don’t know if I can inherit any unused threshold from my husband (separated not divorced) if he dies first but I’m pretty sure his property is worth roughly the same as mine, so I think both of us are probably liable for any cash we have at out deaths. At my death everything is split equally between my children.

Keep_pedalling

bouicca21 said:

I have no idea what INC or ACC means. I live on a pension. I’ve always had to be frugal, and for the first time in my life I have money left over at the end of the month. 

I’m not sure if my estate will be liable to IHT - I live in a modest property but it is in London, and the property value hovers around the IHT threshold, currently probably more.   I don’t know if I can inherit any unused threshold from my husband (separated not divorced) if he dies first but I’m pretty sure his property is worth roughly the same as mine, so I think both of us are probably liable for any cash we have at out deaths. At my death everything is split equally between my children.

Don’t worry about the INC / ACC I was answering Sea_shell’s question and it does not apply in your case. 

Your estate would need to be worth over £500k before IHT would be an issue as you also get a residential nil rate band to add to the standard nil rate band.

It is possible that should your husband die before you that there maybe the transferable allowances available, but only if you were still married at the time and you inherited his estate, so safest to assume that won’t be the case.

Have you made a will since you separated? If not that should be on the top of your list to do things.

bouicca21

Thank you - yes have made a will.  He has too, and both leave everything to be divided between the children, so neither of us will inherit anything from the other (except possibly our occupational pensions, which is a completely different issue). I have also left a letter explaining why he gets nothing. I don’t think he’d try to claim anything but just in case ...

If I moved away from London I could buy a similar, or better, property for less than £200,000 but the state of the London property market dictates way more.

Keep_pedalling

bouicca21 said:

Thank you - yes have made a will.  He has too, and both leave everything to be divided between the children, so neither of us will inherit anything from the other (except possibly our occupational pensions, which is a completely different issue). I have also left a letter explaining why he gets nothing. I don’t think he’d try to claim anything but just in case ...

If I moved away from London I could buy a similar, or better, property for less than £200,000 but the state of the London property market dictates way more.

The problem with having an estate in IHT territory with everything tied up in your home is that it’s impossible to reduce the IHT liability, without selling to downsize or move to a cheaper area.