Gifting out of income

Madeinireland101

Hi - I am considering gifting to my children some of my surplus funds out of income which as I understand allows you to gift to them and remove sums from the potential threat of inheritance tax.

Does this need to be done as an individual or can you do it all as a couple?

Assuming you have to do it as an individual I assume you need to partition your income and expenses between each so you can work out how much can be given.  This can be quite difficult to do accurately and in some cases leaves a fair amount of leeway in terms of how you partition spending - Do you have to work out that level of detail or can you just assume a 50% split on spending for all things other than the  obvious like motoring costs where one individual owns the car for example?

Any advice gratefully received…

El_Torro

I think you're over complicating things. Essentially you can gift whatever you want to whoever you want with no taxes to pay (either you or them). If you die within 7 years of gifting the money then there will be inheritance tax to pay, though your estate will be in no worse position than if you hadn't gifted the money. 

Where it does get a bit more complicated is if you gift a significant sum (say a house) and you then go into care. If you can't afford private care then your local council will assume you have deliberately deprived yourself of assets and won't stump up the bill. 

I don't see the relevance of gifting money from income or who within the couple is responsible for the gift.

Keep_pedalling

You say surplus funds which sounds like capital rather than income. 

Gifting from excess income does require good record keeping so you should have a look at IHT 403 to see what is required from your executors. This will have to be done as individuals. 

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

stuart321

My understanding is if you establish a regular pattern of gifting from your income and it doesn't impact your standard of living then it can qualify as IHT exempt.  Records demonstrating it was regular gifting are recommended.

See https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm14231:
The [IHT] exemption under IHTA84/S21 applies where the taxpayer can show that a gift (transfer of value):

- formed part of the transferor’s normal expenditure (IHTM14241),

- was made out of income (IHTM14250), and

- left the transferor with enough income for them to maintain their normal standard of living (IHTM14251).

SnowMan

If you are thinking of using the gifts out of income exemption for inheritance tax to avoid issues if you die within 7 years, and you think you will be liable for inheritance tax, it is important to see what information will be required by your executor for the IHT forms. Here is a link to IHT403 (it's on page 8). Gifts out of income of more than £3,000 in any year must be shown in full according to the IHT400 notes. You probably want to fill that information in each year and leave it with your papers for whoever might be the executor.

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

Also look at the HMRC inheritance tax manual on this

https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm14250

I suspect you may need to identify who has the surplus income to cover the gifts, and if you both do and want to gift 50/50 then make sure payments come out of a joint account or half each out of accounts of both. And expenditure I think you probably just need to do something reasonable. You may both pay for petrol for the car despite who owns it. The size of the gifts relative to the surplus income might be relevant too, the closer it is the more likely it might be queried. But that's all purely a  guess; I had to look into a bit when I was recently an executor but decided it was easier to go a different way than use that route.

Perhaps ask on the death, funerals and probate part of the forum where you might get better answers

Linton

Madeinireland101 said:

Hi - I am considering gifting to my children some of my surplus funds out of income which as I understand allows you to gift to them and remove sums from the potential threat of inheritance tax.

Does this need to be done as an individual or can you do it all as a couple?

Assuming you have to do it as an individual I assume you need to partition your income and expenses between each so you can work out how much can be given.  This can be quite difficult to do accurately and in some cases leaves a fair amount of leeway in terms of how you partition spending - Do you have to work out that level of detail or can you just assume a 50% split on spending for all things other than the  obvious like motoring costs where one individual owns the car for example?

Any advice gratefully received…

Each gift must be from an individual. If the gift comes from joint assets then assume 50/50 ownership unless there is a good reason not to.

To demonstrate that the gifts come from income your executor needs to document that total income in each year equals or exceeds total expenditure including the claimed gifts. Unused income can be carried over from the previous year but turns into savings after then.

To help your executor you need to keep detailed notes, perhaps an annotated bank statement.

There is a requirement that the gifts are regular and ongoing but reasonable flexibility should be ok. There was a test case where the deceased simply calculated her excess income each year and gifted it to her children.  The courts ruled that this met the requirement. Don’t try to be too “clever”, you don’t want to become another test case.

Madeinireland101

Thanks all - very helpful 

squirrelpie

Going from @stuart321's link to the contents at https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual makes me realise just how complicated the whole subject of inheritance is. Making gifts out of income seems fairly easy if you have a pretty fixed income, like my wife - state pension plus NHS pension plus little bits of interest. Then if her bank balance is increasing she can give away the surplus funds

But in my case I have state pension plus a small DB pension, plus a SIPP. The SIPP makes things more complicated because I choose how much income to take from it. And I also have an ISA that I can choose to take income from. How is it decided whether a withdrawal from my ISA is capital or income? Ditto for my SIPP, now.

Linton

squirrelpie said:

Going from @stuart321's link to the contents at https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual makes me realise just how complicated the whole subject of inheritance is. Making gifts out of income seems fairly easy if you have a pretty fixed income, like my wife - state pension plus NHS pension plus little bits of interest. Then if her bank balance is increasing she can give away the surplus funds

But in my case I have state pension plus a small DB pension, plus a SIPP. The SIPP makes things more complicated because I choose how much income to take from it. And I also have an ISA that I can choose to take income from. How is it decided whether a withdrawal from my ISA is capital or income? Ditto for my SIPP, now.

Money in an ISA or a savings account is an asset so money taken from the ISA is not income. However I think that dividends and interest earned within the ISA in the current year could be regarded as income. How capital gains fit in I am not sure. I think a SIPP could be treated in the same way. But much of this could come within my previous advice that one should not try to be too clever. Keep things simple for your executor.

Jacklob

Hi, I’m also exploring the surplus income route. I have set up a  regular monthly UCPLS income, do I assume this would look more plausible than annual lump sums. Planning to calculate the monthly income to give me £1000 surplus to transfer to my son each month. You can obviously manipulate this to fall within the guidelines. Or will HMRC be suspicious of this. 

squirrelpie

Linton said:

Money in an ISA or a savings account is an asset so money taken from the ISA is not income. However I think that dividends and interest earned within the ISA in the current year could be regarded as income. ... I think a SIPP could be treated in the same way.

I'm not sure about a SIPP, that's my question. Looked at one way it's a pot of capital. But if I'd bought an annuity with it, it's clearly income. But if I use flexi-drawdown the distinction seems pretty arbitrary. I wonder if HMRC have any rules or guidelines as to how to distinguish between them?