Gifts out of income possibly incorrectly made

StitchInTime99

Hi,
On gifting balance sheets - it seems clear that deceased was of the view that gifts out of surplus income could be backdated by 7 years.

So, for example, only very small gifts out of income were made in 2017, 2018, 2019, 2020, 2021 but then a large gift was made in 2022 using the unused surplus from each of these years.

The deceased has documented 'gifts exceeding surplus income are reduced by plus figures in the last 7 years'

I read on gov advice that surplus income is considered capital after 2 years. Is there something I don't know here? Was there once a 7 year rule for gift out of surplus income? Is it no more?

If it is 2 years, does this mean can backdate the previous 2 years. So a gift paid in March 2022 - could the 2021 and 2020 allowance be carried forward. Or just the 2021 as the gift was made at the end of the financial year

Many thanks

Linton

StitchInTime99 said:

Hi,
On gifting balance sheets - it seems clear that deceased was of the view that gifts out of surplus income could be backdated by 7 years.

So, for example, only very small gifts out of income were made in 2017, 2018, 2019, 2020, 2021 but then a large gift was made in 2022 using the unused surplus from each of these years.

The deceased has documented 'gifts exceeding surplus income are reduced by plus figures in the last 7 years'

I read on gov advice that surplus income is considered capital after 2 years. Is there something I don't know here? Was there once a 7 year rule for gift out of surplus income? Is it no more?

If it is 2 years, does this mean can backdate the previous 2 years. So a gift paid in March 2022 - could the 2021 and 2020 allowance be carried forward. Or just the 2021 as the gift was made at the end of the financial year

Many thanks

You certainly couldnt backdate gifts out of surplus income for 7 years when I was an executor in 2016, 2 years was the rule then.  It seems the deceased was confused.

,

Keep_pedalling

There has never been a 7 year rule for GFI so only one year can be carried forward. Did he use his full excess income the following year? 

StitchInTime99

Just a quick question: 

When calculating surplus income each year. I take all the income and deduct expenses.

So if net income was 150k and annual expenses were 65k - leaving 85k surplus.

If a car was bought outright (no credit agreement or loan) - would this purchase need to come off the 85k and reduce the amount available to distribute as Gift out of Income.

Is a car purchase considered 'normal' expenditure or would it be considered to have been bought out of savings account? Thank you

Keep_pedalling

StitchInTime99 said:

Just a quick question: 

When calculating surplus income each year. I take all the income and deduct expenses.

So if net income was 150k and annual expenses were 65k - leaving 85k surplus.

If a car was bought outright (no credit agreement or loan) - would this purchase need to come off the 85k and reduce the amount available to distribute as Gift out of Income.

Is a car purchase considered 'normal' expenditure or would it be considered to have been bought out of savings account? Thank you

Interesting question and I don’t know the answer. Most people would be raiding their savings for a big ticket item like a car but it obviously the deceased could do this 100% from income. Did he regularly change cars?

StitchInTime99

Well I'd say regularly maybe every 10 years. But I think every 3 years is the norm now so maybe every 10 years is not regular
 

Keep_pedalling

StitchInTime99 said:

Well I'd say regularly maybe every 10 years. But I think every 3 years is the norm now so maybe every 10 years is not regular
 

So not regular expenditure. The real problem you will have is showing HMRC that a patten of gifting large amounts of his excess income had been established. After he made that gift in March 22, did he continue that into the following tax years?

I really think you need to the assistance of a professions tax specialist here considering how much money is involved.

Linton

StitchInTime99 said:

Just a quick question: 

When calculating surplus income each year. I take all the income and deduct expenses.

So if net income was 150k and annual expenses were 65k - leaving 85k surplus.

If a car was bought outright (no credit agreement or loan) - would this purchase need to come off the 85k and reduce the amount available to distribute as Gift out of Income.

Is a car purchase considered 'normal' expenditure or would it be considered to have been bought out of savings account? Thank you

I think the problem you will find is that very little of GFI is defined by law.  In some cases HMRC have provided indications of how they will handle it (such as 2 years for income to turn into savings) and in others there may be case law where the courts have decided what parliament really intended though I only know of one example. As suggested by @Keep_pedalling a good tax specialist may well be the only way you will get an answer perhaps more definitive than any given here.  Though whether it would be provably correct I dont know.


I suggest that you just keep well clear of doubtful claims if possible and your current policy seems best.    You dont want to pay for being a famous test case and one arguable decision may lead HMRC to investigate more deeply. 

Keep_pedalling

A big lesson here for anyone fortunate enough to have way more money than they will ever need, is don’t leave IHT planning until you reach your 80s.