IHT gifting rules

bouicca21

I have started a spreadsheet to prove that my regular gifts to grandchildren come from surplus income rather than savings.  I think this still leaves me able to gift £3000 a year from savings.

But next year I think I will have a very substantial bill for building work.  No matter how much belt tightening I do most of this will have to come out of  savings.  So does a one off capital expenditure negate the surplus income argument?  Will I have to count the regular gifts as part of the £3000 limit?

My current calculations suggest my estate wise close two the threshold for IHT. So depending on future changes to the rules, it may slip into IHT territory.

tacpot12

bouicca21 said:

...  So does a one off capital expenditure negate the surplus income argument?  

I don't think it does, but this assumes that the surplus income you are giving away is above the level of income that was needed to accumulate the savings. i.e. you would have been able to save the amount you have saved AND give away the same amount of money at the same time. I think the easiest way to answer the question is to ask whether you are going to use all your savings for this building work. If it wipes out all your savings, then I don't think you can claim that you had excess income. If you will have some savings left, you clearly did have some excess income.

It's a very imprecise argument though. You could bring a lot more factors into it. 

Keep_pedalling

This is one of those difficult areas, but I would say one off costs for major building repair is capital expenditure, so should not effect established gifting from income.

Linton

I think that if you can demonstrate that your regular gifts from income are made year after year and your depletion of savings is no more than your expenditure on building repairs you should be OK but unless there has been a court case where a judge has provided a definitive ruling on a similar situation one cant be absolutely sure.   If you can cover the gifts from the £3K allowance I would use that ahead of claiming GFI.

Robert_McGeddon

What is major?  £30K on a new roof almost certainly would be whilst £3K for repointing brickwork is probably repairs and renewals, not capital.  The former shouldn't feature in the gifts out of recurring income calc whilst the latter almost certainly should.

Arguably a new roof would increase the value of the house, maybe by even £30K.  In this scenario there is no diminution of overall asset value, reinforcing the view that the roof renewal is capital. Contrast that with recurring smaller regular outgoings which have to be regularly financed - repointing one year, boiler repair the next and so on.

Bookworm105

Robert_McGeddon said:

What is major?  £30K on a new roof almost certainly would be whilst £3K for repointing brickwork is probably repairs and renewals, not capital.  The former shouldn't feature in the gifts out of recurring income calc whilst the latter almost certainly should.

Arguably a new roof would increase the value of the house, maybe by even £30K.  In this scenario there is no diminution of overall asset value, reinforcing the view that the roof renewal is capital. Contrast that with recurring smaller regular outgoings which have to be regularly financed - repointing one year, boiler repair the next and so on.

You make a rather debatable viewpoint. Definition of capital expenditure is not that simple when it comes to a roof replacement, just because you spent a lot of money does not make it a capital improvement

for it is be capital there has to be an "enhancement to the value of the asset" arising from that expenditure -  the underpinning principle being what is the purpose for the expenditure, not whether there is actually an enhancement of value
CG15180 - Expenditure: enhancement expenditure - HMRC internal manual - GOV.UK

the building had a roof, it now has a replacement roof, the new one does the same job as the old one.
The other important principle is "entirety", although most often used in examples looking at can a cost be claimed as a repair rather than capital, the "fitted kitchen" in this one illustrates the point. The roof is not an asset in its own right, it is part of the entire building. The replacement roof preserves the integrity of the entire building, it does not increase its value. 30K roof is a repair, not improvement, so a revenue expense .

BIM46910 - Specific deductions: repairs and renewals: what is a repair: the ‘entirety’ - HMRC internal manual - GOV.UK

BIM46911 - Specific deductions: repairs and renewals: what is a repair: the ‘entirety’: examples - HMRC internal manual - GOV.UK

bouicca21

Crikey, this really is a minefield.  I am grateful for all the comments.  I think I’ll play it safe!  

More_complicated_than_that

Bookworm105 said:

Robert_McGeddon said:

What is major?  £30K on a new roof almost certainly would be whilst £3K for repointing brickwork is probably repairs and renewals, not capital.  The former shouldn't feature in the gifts out of recurring income calc whilst the latter almost certainly should.

Arguably a new roof would increase the value of the house, maybe by even £30K.  In this scenario there is no diminution of overall asset value, reinforcing the view that the roof renewal is capital. Contrast that with recurring smaller regular outgoings which have to be regularly financed - repointing one year, boiler repair the next and so on.

You make a rather debatable viewpoint. Definition of capital expenditure is not that simple when it comes to a roof replacement, just because you spent a lot of money does not make it a capital improvement

for it is be capital there has to be an "enhancement to the value of the asset" arising from that expenditure -  the underpinning principle being what is the purpose for the expenditure, not whether there is actually an enhancement of value
CG15180 - Expenditure: enhancement expenditure - HMRC internal manual - GOV.UK

the building had a roof, it now has a replacement roof, the new one does the same job as the old one.
The other important principle is "entirety", although most often used in examples looking at can a cost be claimed as a repair rather than capital, the "fitted kitchen" in this one illustrates the point. The roof is not an asset in its own right, it is part of the entire building. The replacement roof preserves the integrity of the entire building, it does not increase its value. 30K roof is a repair, not improvement, so a revenue expense .

BIM46910 - Specific deductions: repairs and renewals: what is a repair: the ‘entirety’ - HMRC internal manual - GOV.UK

BIM46911 - Specific deductions: repairs and renewals: what is a repair: the ‘entirety’: examples - HMRC internal manual - GOV.UK

To be honest, I'm not clear how any of that relates to IHT and what is meant by "expenditure".  Are you sure that is right?

Also, I don't think it is helpful to start creating new concepts like "major".  The legislation just uses "normal".  

Jeremy535897

A one off amount that would not normally be expected to be met out of income, such as a substantial repair or improvement to a property, would not reduce the income available to cover the exemption, although of course future income will presumably be smaller. You only reduce income available for the exemption by usual living expenses etc. I think this extract from an article explains it quite well:

How to identify surplus income:

• Income: Total income includes earnings, pensions, investments, and any other sources.
• Regular Commitments: Deduct regular bills, living expenses, and other recurring financial responsibilities.
• Surplus: The remaining balance is the surplus income available for gifting.

https://www.apw-ifa.co.uk/inheritance-tax-gifts-out-of-surplus-income/

Robert_McGeddon

Bookworm105 said:

for it is be capital there has to be an "enhancement to the value of the asset" arising from that expenditure.

Quite.  That was the point I was trying to make.

Jeremy, as usual, brings some clarity to the matter.

Jeremy535897

Robert_McGeddon said:

Bookworm105 said:

for it is be capital there has to be an "enhancement to the value of the asset" arising from that expenditure.

Quite.  That was the point I was trying to make.

Jeremy, as usual, brings some clarity to the matter.

Thank you. It is very confusing that the normal expenditure out of income rules do not mirror income tax and capital gains tax rules. Income, in the normal expenditure out of income rules, is not the same as taxable "income", so excludes, for example, gains on life assurance policies. Replacing the roof on a house would be revenue for income tax or capital gains tax (absent any substantial element of improvement), yet would not directly reduce income available for use in the normal expenditure out of income rules, because it is a one-off type of expenditure rather than year to year living expenses.