Inheritance tax - regular gifts from excess income

Workerbee999

Couple of questions on this please:

Is income only earned income or also pension income? ( regular DB income is relatively easy to value,  what about variable lump sums out of DC including the tax free element)

What sort of records are required to prove gifts out of regular income? Considering nursery, private school and uni support it has cost around £10-12k per year - is that enough to continue gifting that sort of level going forwards? But I don’t have bank statements etc going back that long. Do things like parental support for uni count as gifts when parents are expected to top up the loan?

Do we have to make gifts monthly? What if we saved up out of income and gifted it once a year? ( we currently give £4k pa into a LISA, saving up monthly but giving once a year - I know we have £3k gifts a year that cover this but using it as an example)

When we are retired we will have enough pension income to continue some level of regular gifts but we have also saved up a pot of “fun money” for travel etc - will spending that then suggest the gifts are not out of excess income because the savings are reducing even though that has been saved from income specifically for that purpose?

Thanks 

daveshep26

Workerbee999 said:

Couple of questions on this please:

Is income only earned income or also pension income? ( regular DB income is relatively easy to value,  what about variable lump sums out of DC including the tax free element)

What sort of records are required to prove gifts out of regular income? Considering nursery, private school and uni support it has cost around £10-12k per year - is that enough to continue gifting that sort of level going forwards? But I don’t have bank statements etc going back that long. Do things like parental support for uni count as gifts when parents are expected to top up the loan?

Do we have to make gifts monthly? What if we saved up out of income and gifted it once a year? ( we currently give £4k pa into a LISA, saving up monthly but giving once a year - I know we have £3k gifts a year that cover this but using it as an example)

When we are retired we will have enough pension income to continue some level of regular gifts but we have also saved up a pot of “fun money” for travel etc - will spending that then suggest the gifts are not out of excess income because the savings are reducing even though that has been saved from income specifically for that purpose?

Thanks 

I don't think I can provide answers for all your questions, but have had some similar thoughts / questions over years; - 

Pension income - I imagine you plan for and record the actual income taken per tax year;

I can be more definitive on #2 - this spooked my planning approach in the last year and I found a good solicitor's article - that child (dependant's) maintenance expenditure for full-time education is not classified as a 'gift' for IHT (I now can't find a reference I thought i'd saved = but here is HRMC item < https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm04175 >  ) .  I think this is clarifying common sense - if you are obliged to pay something , it isn't really meeting definition of 'gift' ;

RNV

What sort of records are required to prove gifts out of regular income?  Have a look at page 8 of: https://assets.publishing.service.gov.uk/media/5f60b44cd3bf7f7234487bf0/IHT403-05-20.pdf

From that page 8, Is “Salary”, “interest” etc  income after tax/pension etc contributions? 

 E.g my base salary  is more than double my net pay on payslip (I make significant pension contribution) - what do I include?

RNV

Apologies, i missed the IT line - so that js clear. 

Then “salary” will be “gross taxable income” (which will already include sal sac deductions) - am i correct? Thanks

Jeremy535897

"Income" for the purposes of the normal expenditure out of income rules is given its ordinary definition, so it includes types of income that are not taxable (for example rent a room exempt income), and excludes things treated as income which are not (such as gains on investment bonds).
Disposable income is after taking out living and other expenses, including any tax on income. If you spend your income on pension contributions, it's the same as spending it on routine holidays. But a once in a lifetime six weeks holiday costing £50,000 is not, just as a one off very large pension contribution is not. Equally, I doubt a one off lump sum from a pension scheme is "income" for these purposes, whether taxable or not.
The inheritance tax manuals are full of HMRC guidance on the subject.See:
https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm14231
Come 30 October, whether this exemption survives is unknown.

Workerbee999

Thanks everyone, really helpful answers

Jeremy535897

There was an incorrect "not" in my previous post, so I have edited it.