Normal expenditure out of income

loiner

poseidon1 said:

loiner said:

MarzipanCrumble said:

If you are keeping a spreadsheet and the estate is going to be liable for IHT then replicate the form you will need to complete to show HMRC.  Look at page 8.

https://assets.publishing.service.gov.uk/media/5f60b44cd3bf7f7234487bf0/IHT403-05-20.pdf

Good idea, thanks.

Having had to prove to hmrc that regular gifts out of surplus income exemption did arise on a couple of estates in the past, would strongly recommend a yearly analysis laid out in accordance with page 8 of the hmrc declaration form as suggested by loiner.

Merely making some sort of unsupported declaration to that effect would be of no use to the  executors when time comes to complete the IHT 403. 

Fully intend to do that, thanks.

user1977

loiner said:

user1977 said:

Has anybody recommended such a letter? I'm not sure it would make any difference - whether or not he's actually paying the gifts out of normal income is a question of fact.

Most of the words are copied and pasted from the gov.uk website. I just thought it better to formalise the arrangement.

But it looks like you're trying to formalise some sort of agreement between the gifter and the recipient. There's no need to do that, and it won't help with the tax position. Indeed, there's no need for the recipient to even know whether it's out of normal income or not (unless they're later going to be the one doing the Inheritance Tax calculation!).

loiner

user1977 said:

loiner said:

user1977 said:

Has anybody recommended such a letter? I'm not sure it would make any difference - whether or not he's actually paying the gifts out of normal income is a question of fact.

Most of the words are copied and pasted from the gov.uk website. I just thought it better to formalise the arrangement.

But it looks like you're trying to formalise some sort of agreement between the gifter and the recipient. There's no need to do that, and it won't help with the tax position. Indeed, there's no need for the recipient to even know whether it's out of normal income or not (unless they're later going to be the one doing the Inheritance Tax calculation!).

I'd probably be wasting my time then. I'm the one keeping records of all his finances as LPA holder and eventually executor.

Linton

poseidon1 said:

loiner said:

MarzipanCrumble said:

If you are keeping a spreadsheet and the estate is going to be liable for IHT then replicate the form you will need to complete to show HMRC.  Look at page 8.

https://assets.publishing.service.gov.uk/media/5f60b44cd3bf7f7234487bf0/IHT403-05-20.pdf

Good idea, thanks.

Having had to prove to hmrc that regular gifts out of surplus income exemption did arise on a couple of estates in the past, would strongly recommend a yearly analysis laid out in accordance with page 8 of the hmrc declaration form as suggested by loiner.

Merely making some sort of unsupported declaration to that effect would be of no use to the  executors when time comes to complete the IHT 403. 

Very much agreed.

One aspect may be useful.  You can carry forward surplus income to some extent as it does not become savings for, I think, 2-3 years.  Exactly how long seems rather vague.   So start your analysis 2-3 years before the first gift.

loiner

Linton said:

poseidon1 said:

loiner said:

MarzipanCrumble said:

If you are keeping a spreadsheet and the estate is going to be liable for IHT then replicate the form you will need to complete to show HMRC.  Look at page 8.

https://assets.publishing.service.gov.uk/media/5f60b44cd3bf7f7234487bf0/IHT403-05-20.pdf

Good idea, thanks.

Having had to prove to hmrc that regular gifts out of surplus income exemption did arise on a couple of estates in the past, would strongly recommend a yearly analysis laid out in accordance with page 8 of the hmrc declaration form as suggested by loiner.

Merely making some sort of unsupported declaration to that effect would be of no use to the  executors when time comes to complete the IHT 403. 

Very much agreed.

One aspect may be useful.  You can carry forward surplus income to some extent as it does not become savings for, I think, 2-3 years.  Exactly how long seems rather vague.   So start your analysis 2-3 years before the first gift.

That's great advice. If we can effectively take surplus income from the past couple of years then we could virtually eliminate his IHT exposure.

Malthusian

Linton said:

Very much agreed.

One aspect may be useful.  You can carry forward surplus income to some extent as it does not become savings for, I think, 2-3 years.  Exactly how long seems rather vague.   So start your analysis 2-3 years before the first gift.

IHTM14250: (emphasis added)

You [the HMRC tax collector] 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.

loiner said:

Linton said:

poseidon1 said:

loiner said:

MarzipanCrumble said:

If you are keeping a spreadsheet and the estate is going to be liable for IHT then replicate the form you will need to complete to show HMRC.  Look at page 8.

https://assets.publishing.service.gov.uk/media/5f60b44cd3bf7f7234487bf0/IHT403-05-20.pdf

Good idea, thanks.

Having had to prove to hmrc that regular gifts out of surplus income exemption did arise on a couple of estates in the past, would strongly recommend a yearly analysis laid out in accordance with page 8 of the hmrc declaration form as suggested by loiner.

Merely making some sort of unsupported declaration to that effect would be of no use to the  executors when time comes to complete the IHT 403. 

Very much agreed.

One aspect may be useful.  You can carry forward surplus income to some extent as it does not become savings for, I think, 2-3 years.  Exactly how long seems rather vague.   So start your analysis 2-3 years before the first gift.

That's great advice. If we can effectively take surplus income from the past couple of years then we could virtually eliminate his IHT exposure.

Must be quite a small exposure; usually the point of using the "normal expenditure out of income" allowance is that it stops your taxable estate increasing. It can only eliminate an Inheritance Tax liability if you've only just crossed the threshold and still have time to give away the surplus income that brought you over it.

Most people's estate value will continue to increase anyway due to house price inflation and other capital gains.

Linton

Malthusian said:

Linton said:

Very much agreed.

One aspect may be useful.  You can carry forward surplus income to some extent as it does not become savings for, I think, 2-3 years.  Exactly how long seems rather vague.   So start your analysis 2-3 years before the first gift.

IHTM14250: (emphasis added)

You [the HMRC tax collector] 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.

loiner said:

Linton said:

poseidon1 said:

loiner said:

MarzipanCrumble said:

If you are keeping a spreadsheet and the estate is going to be liable for IHT then replicate the form you will need to complete to show HMRC.  Look at page 8.

https://assets.publishing.service.gov.uk/media/5f60b44cd3bf7f7234487bf0/IHT403-05-20.pdf

Good idea, thanks.

Having had to prove to hmrc that regular gifts out of surplus income exemption did arise on a couple of estates in the past, would strongly recommend a yearly analysis laid out in accordance with page 8 of the hmrc declaration form as suggested by loiner.

Merely making some sort of unsupported declaration to that effect would be of no use to the  executors when time comes to complete the IHT 403. 

Very much agreed.

One aspect may be useful.  You can carry forward surplus income to some extent as it does not become savings for, I think, 2-3 years.  Exactly how long seems rather vague.   So start your analysis 2-3 years before the first gift.

That's great advice. If we can effectively take surplus income from the past couple of years then we could virtually eliminate his IHT exposure.

Must be quite a small exposure; usually the point of using the "normal expenditure out of income" allowance is that it stops your taxable estate increasing. It can only eliminate an Inheritance Tax liability if you've only just crossed the threshold and still have time to give away the surplus income that brought you over it.

Most people's estate value will continue to increase anyway due to house price inflation and other capital gains.

It depends very much on your circumstances.    In one case I know the deceased had minimal expenditure and >£100K/year income.  Gifts from Income relief was a major benefit.