Income, Expenditure and Gifting from Excess Income

Madeinireland101

I’m also not an expert but my reading of that situation is that the person with the bigger income has £20k of excess income while the other has zero. You each share the expenses and the person with the bigger income gifts the shortfall to the other - meaning they are left with the bigger excess. This may be wrong and I’d also like clarification but I think it’s important as I think HMRC in areas of joint accounts gives a lot more weight to the person who has contributed the bigger sums into that account rather than calling it all 50 50. This is the way I currently intend to setup my excess income giving.

clivep

My take is...

Expenditure is split 50:50 so £15K each.

Your wife has expenditure greater than income so cannot gift from income.

You have surplus income of £25K so can gift this. Whether or not you need to gift £5 to your wife is unknown. If she has capital in her name then you would not have to gift her anything leaving you able to gift the whole £25K to your children.

The £3K exemption for you and your wife is in addition and can be made from capital. You are also allowed to use the previous year's allowance if this had not been utilised. So, if this had not been done last year, £12K from capital could be gifted between you before 5th April without affecting the amount of gifts from income.

Madeinireland101

clivep said:

My take is...

Expenditure is split 50:50 so £15K each.

Your wife has expenditure greater than income so cannot gift from income.

You have surplus income of £25K so can gift this. Whether or not you need to gift £5 to your wife is unknown. If she has capital in her name then you would not have to gift her anything leaving you able to gift the whole £25K to your children.

The £3K exemption for you and your wife is in addition and can be made from capital. You are also allowed to use the previous year's allowance if this had not been utilised. So, if this had not been done last year, £12K from capital could be gifted between you before 5th April without affecting the amount of gifts from income.

I agree with this take apart from the point  about your wife having Capital. I think the key here is that you may need to demonstrate that she used that capital to make up the shortfall. If you don’t do this it opens up the opportunity for HMRC to follow up in more detail about your expenditure to ensure it was an appropriate split and exactly how it was funded. I have chosen to take that out of the equation completely by maintaining that any shortfall from one side is made up by the other side - meaning that any closer look is irrelevant but it does in this case reduce the opportunity of excess down to £20k from £25k but at least I’ll die happy in the knowledge that HMRC would have a harder time proclaiming that my gifting is invalid 😀

if anyone disagrees I’d be delighted to hear from them as this is something I’m gearing up to do from next year but capturing info from this year and I’d like to ensure it’s all watertight.

LHW99

[Deleted User] said:

LHW99 said:

My inexpert take, is that if either of you can sign for payments etc on the account, then you are effectively "giving" your spouse some of your income (untaxed as passing to spouse), so you have £25k each income and £15k each expenditure, meaning you have £10k each excess income.

I'm sure the exciting HMRC manual defines it somewhere

Can I suggest that people who are interested in this set up a new thread in the tax forum where some people with useful tax experience are more likely to contribute?

The basic answer to all these questions is that a proper analysis will depend on the facts.  For example, a UK bank account will probably be treated differently to a US bank account (where a joint bank account may be community property).  How the payments are made, what the intention is between the parties and how things are made to happen are importants.  As will be what evidence you have to support the position to be taken by the executors.

As I've said before, the proper analysis of joint bank accounts is complicated.  Saying that I disagree with your "inexpert take" that if either can make transfers from a joint account does not "effectively" mean you are "giving" your spouse income.  Let's say W has a large dividend on shares that she intends to give to her children.  The dividend is paid to a joint bank account by the company, W is away on work and did not spot the dividend being paid for a week or two.  W rings H and tells him about the dividend and asks H to write the cheques to the kids.  H does that.  This is a gift from W and not H.

On the other hand, it is easy to imagine situations where the facts show that there is a joint gift where it can be split 50/50.  If you want to be sure that the right person is doing the giving then you want to make sure that the facts support that and the executors are able to show that to HMRC if asked.

The technical basis for saying that W putting money into a joint bank account is, by itself, a "nothing" for IHT is that s5(2) means that W has a "general power" to dispose of the money in the joint account and so that is not a transfer of value.  There is a Supreme Court case on joint bank accounts that shows how complicated the analysis of whose money it is: https://www.jcpc.uk/cases/docs/jcpc-2016-0075-judgment.pdf

You can read more here: https://communities.lawsociety.org.uk/january-2016/casing-the-joints/5053120.article (and this article was before the Supreme Court case I mentioned).

Interesting - could one of the Mods split this off I wonder? - @MallyGirl ?

Madeinireland101

I would would still supplement any information with suitable letters indicating who is gifting in each circumstance so that should at least give the executors further information and evidence to support the position 😀

newatc

Wow. Thanks for all the responses but obviously, as so often with our over complex Tax system, it is not crystal clear. 
I think for the time being I will go along with Madeinireland's 2,57pm post and also in their suggestion to leave a note regarding my understanding and method of calculation of the excess. 

newatc

Madeinireland101 said:

clivep said:

My take is...

Expenditure is split 50:50 so £15K each.

Your wife has expenditure greater than income so cannot gift from income.

You have surplus income of £25K so can gift this. Whether or not you need to gift £5 to your wife is unknown. If she has capital in her name then you would not have to gift her anything leaving you able to gift the whole £25K to your children.

The £3K exemption for you and your wife is in addition and can be made from capital. You are also allowed to use the previous year's allowance if this had not been utilised. So, if this had not been done last year, £12K from capital could be gifted between you before 5th April without affecting the amount of gifts from income.

I agree with this take apart from the point  about your wife having Capital. I think the key here is that you may need to demonstrate that she used that capital to make up the shortfall. If you don’t do this it opens up the opportunity for HMRC to follow up in more detail about your expenditure to ensure it was an appropriate split and exactly how it was funded. I have chosen to take that out of the equation completely by maintaining that any shortfall from one side is made up by the other side - meaning that any closer look is irrelevant but it does in this case reduce the opportunity of excess down to £20k from £25k but at least I’ll die happy in the knowledge that HMRC would have a harder time proclaiming that my gifting is invalid 😀

if anyone disagrees I’d be delighted to hear from them as this is something I’m gearing up to do from next year but capturing info from this year and I’d like to ensure it’s all watertight.

I found this article which I think supports your theory  https://www.thisismoney.co.uk/money/financial-planning/article-13808087/gift-surplus-income-inheritance-allowance-exemption-daughter-joint-account.html

Madeinireland101

newatc said:

Madeinireland101 said:

clivep said:

My take is...

Expenditure is split 50:50 so £15K each.

Your wife has expenditure greater than income so cannot gift from income.

You have surplus income of £25K so can gift this. Whether or not you need to gift £5 to your wife is unknown. If she has capital in her name then you would not have to gift her anything leaving you able to gift the whole £25K to your children.

The £3K exemption for you and your wife is in addition and can be made from capital. You are also allowed to use the previous year's allowance if this had not been utilised. So, if this had not been done last year, £12K from capital could be gifted between you before 5th April without affecting the amount of gifts from income.

I agree with this take apart from the point  about your wife having Capital. I think the key here is that you may need to demonstrate that she used that capital to make up the shortfall. If you don’t do this it opens up the opportunity for HMRC to follow up in more detail about your expenditure to ensure it was an appropriate split and exactly how it was funded. I have chosen to take that out of the equation completely by maintaining that any shortfall from one side is made up by the other side - meaning that any closer look is irrelevant but it does in this case reduce the opportunity of excess down to £20k from £25k but at least I’ll die happy in the knowledge that HMRC would have a harder time proclaiming that my gifting is invalid 😀

if anyone disagrees I’d be delighted to hear from them as this is something I’m gearing up to do from next year but capturing info from this year and I’d like to ensure it’s all watertight.

I found this article which I think supports your theory  https://www.thisismoney.co.uk/money/financial-planning/article-13808087/gift-surplus-income-inheritance-allowance-exemption-daughter-joint-account.html

Thanks - yes that article does seem to reflect my thinking which is good to see. The only grey area  as far as I’m concerned is how we split the visa bills as it’s spent on a whole variety of things - but I think my 50 50 split looks ok so long as I also make up any shortfall in my wife’s position from my income too. Also I suspect some of our expenditure isn’t really “normal expenditure” given we are at times  paying out for renovations in the home or purchasing a new TV etc - which I feel could be classed as one off spend and I could ignore - but just for safety at this stage I’ve included them anyway.

Sea_Shell

When preparing an income vs expenses spreadsheet, do gifts IN count as "income", when then wanting to gift OUT?

EG one family member (parent) adamant they want to treat all their adult children equally and gift a largish (£5k) sum annually, that is not needed (will likely attract IHT for the recipient) and will likely be passed on immediately to other family side (niblings) that are in greater need.      Sort of like with a Deed of Variation situation, but gifts not inheritance.


Also does one need to track tax years or calendar years?   I think the 7 years from date of death is calendar not tax year, but gifts are per tax year?? 

Linton

Sea_Shell said:

When preparing an income vs expenses spreadsheet, do gifts IN count as "income", when then wanting to gift OUT?

EG one family member (parent) adamant they want to treat all their adult children equally and gift a largish (£5k) sum annually, that is not needed (will likely attract IHT for the recipient) and will likely be passed on immediately to other family side (niblings) that are in greater need.      Sort of like with a Deed of Variation situation, but gifts not inheritance.


Also does one need to track tax years or calendar years?   I think the 7 years from date of death is calendar not tax year, but gifts are per tax year?? 

I do not see how incoming cash gifts could not be income for Gifts From Income with of course a time limit of 2 years.   The whole objective of the 7 year rule is to discourage tax avoidance by reduction in long term capital close to death. Immediately re-gifting incoming gifts does not decrease your capital.  I am less clear about incoming gifts of valuable objects, they feel like increases in capital.

IIRC I tracked in tax years which means partial years at each end of the 7 year period.