Another IHT Gift Question

Flossiebus

I recall reading somewhere that surplus income can be used to offset IHT on part of a cash gift that is greater.  As an example if surplus income was £5000  and a gift was £5001 (above the £3,000 threshold) only £1 would be liable for IHT.  Is this the case as it seems sensible but can't now find this anywhere online.

Keep_pedalling

It would all be covered, if you have £5,000 of surplus income you can give that away plus your £3,000 annual allowance. 

Flossiebus

Sorry I've confused things.  I meant after deduction of tgd £3,000 allowance so the theoretical gift would be £8,001.

Flossiebus

I'll ask the question another way.   Once the £3,000 allowance has been deducted, are you able to use any surplus income to reduce the value of a gift that would otherwise all be subject to tax? So if you had a £6,000 gift and £2,000 surplus income is tax due on £3,000 or £1,000 ?

MarzipanCrumble

Might be worth googling as I get the impression that gifts out of income must not deprive the giver, and must be a regular occurence.  Records must be kept to prove this.  Maybe wrong - have been before.
https://www.thp.co.uk/gifts-out-of-surplus-income/

Notepad_Phil

Flossiebus said:

I recall reading somewhere that surplus income can be used to offset IHT on part of a cash gift that is greater.  As an example if surplus income was £5000  and a gift was £5001 (above the £3,000 threshold) only £1 would be liable for IHT.  Is this the case as it seems sensible but can't now find this anywhere online.

Would be useful if that was right, but I've not seen that written anywhere, and to me is not how I would interpret the various gov pages. You also have to remember that any gifts out of surplus income must have been out of a person's normal expenditure and given in an observable, regular pattern. So one off payments of multiple thousands in my opinion would not be allowable, unless it can be proved that it was meant to be the first of a regular series of payments.

Flossiebus

Thankfully there is a regular gift pattern of sorts over the last 7 years so hopefully this test is satisfied.  May ring HMRC to confirm as on the face if it being just £1 short from surplus income would prevent a gift being tax exempt - i.e. a surplus of £4,000 would prevent a gift of say £4,100 (after deduction of £3,000 allowance) being tax free.  This seems on the face of it to contradict the spirit of the two year rule where surplus from a previous year can be carried over to the following year to use for gifts.

Keep_pedalling

Flossiebus said:

Thankfully there is a regular gift pattern of sorts over the last 7 years so hopefully this test is satisfied.  May ring HMRC to confirm as on the face if it being just £1 short from surplus income would prevent a gift being tax exempt - i.e. a surplus of £4,000 would prevent a gift of say £4,100 (after deduction of £3,000 allowance) being tax free.  This seems on the face of it to contradict the spirit of the two year rule where surplus from a previous year can be carried over to the following year to use for gifts.

You can gift as much as you want over your annual allowance and any surplus income, it does not stop those being claimed. If I have surplus income of £2,500 and give away £10,000 each year then £5,500 will be exempt and £4,500 becomes a PET and is subject to the 7 year rule. 

Flossiebus

Yes, that is what I was hoping.  Thanks.  Would you know where this is written down?  

poseidon1

I refer to the link below to  form IHT 403  and direct you to page 8. This demonstrates the significant amount of detail hmrc will require from any estate claiming the gifts out of surplus income exemption for various tax years within 7 years of death.

Anyone considering making use of the exemption should prepare an income and expenditure  schedule  for each year of gift, using the form as their template and retaining such schedules with their Will to assist executors when preparing an IHT return in due course.

Using IHT 403 as a guide should ensure one really does have a surplus of income to gift.

https://www.gov.uk/government/publications/inheritance-tax-gifts-and-other-transfers-of-value-iht403