Gifts from Income-is this acceptable?

Majic

Trying to come up with a plan that would satisfy HMRC. Would this be acceptable?

A person each tax year keeps a spreadsheet of Income and all Expenditure. This would be a summary of the ins/outs of their bank account as that would be everything. Then in Week 52 of tax year, any balance is gifted to dependents.

Same in year 2. etc.

Obviously balance may vary from year to year, but accurate records would show the net amount available at the end of each year.

silvercar

Majic said:

Trying to come up with a plan that would satisfy HMRC. Would this be acceptable?

A person each tax year keeps a spreadsheet of Income and all Expenditure. This would be a summary of the ins/outs of their bank account as that would be everything. Then in Week 52 of tax year, any balance is gifted to dependents.

Same in year 2. etc.

Obviously balance may vary from year to year, but accurate records would show the net amount available at the end of each year.

So you satisfy the “out of income”, the question is whether a variable amount once a year would be considered “regular”.

Majic

kinger101 said:

Satisfy them in what way?

How you calculate the amounts of cash gifted to dependents does't really alter application of the laws relating to IHT, or the taxation of interest in a child's account.

There are Junior ISAs for the interest problem.  Anyone can give away up to £3K each year in total without in being in scope of IHT.  Otherwise, it potentially falls within the deceased's estate so this does need planning of the estate is likely to exceed thresholds.

Sorry, that has nothing to do with my question, but thank you for answering

Majic

silvercar said:

Majic said:

Trying to come up with a plan that would satisfy HMRC. Would this be acceptable?

A person each tax year keeps a spreadsheet of Income and all Expenditure. This would be a summary of the ins/outs of their bank account as that would be everything. Then in Week 52 of tax year, any balance is gifted to dependents.

Same in year 2. etc.

Obviously balance may vary from year to year, but accurate records would show the net amount available at the end of each year.

So you satisfy the “out of income”, the question is whether a variable amount once a year would be considered “regular”.

Exactly and your answer is...
I think it does, because it would be paid regularly at the end of each tax year and it has to be out of surplus income. What could be a more accurate way to calculate surplus income by waiting until the end of the tax year to define how much there is.

Madeinireland101

i think it would be fine but I’d document your approach and write a letter to the recipients that you could both sign to acknowledge your approach and keep a copy with your will  - just to provide proof of intentions with your executor - should you die after 1 year of doing it and to prove it was a regular arrangement. 

silvercar

Majic said:

silvercar said:

Majic said:

Trying to come up with a plan that would satisfy HMRC. Would this be acceptable?

A person each tax year keeps a spreadsheet of Income and all Expenditure. This would be a summary of the ins/outs of their bank account as that would be everything. Then in Week 52 of tax year, any balance is gifted to dependents.

Same in year 2. etc.

Obviously balance may vary from year to year, but accurate records would show the net amount available at the end of each year.

So you satisfy the “out of income”, the question is whether a variable amount once a year would be considered “regular”.

Exactly and your answer is...
I think it does, because it would be paid regularly at the end of each tax year and it has to be out of surplus income. What could be a more accurate way to calculate surplus income by waiting until the end of the tax year to define how much there is.

You’d have to make a few payments for it to be regular. After only one or two years you wouldn’t be able to show that you regularly make the payments. Eg you couldn’t prove that you would always have surplus income.

Madeinireland101

silvercar said:

Majic said:

silvercar said:

Majic said:

Trying to come up with a plan that would satisfy HMRC. Would this be acceptable?

A person each tax year keeps a spreadsheet of Income and all Expenditure. This would be a summary of the ins/outs of their bank account as that would be everything. Then in Week 52 of tax year, any balance is gifted to dependents.

Same in year 2. etc.

Obviously balance may vary from year to year, but accurate records would show the net amount available at the end of each year.

So you satisfy the “out of income”, the question is whether a variable amount once a year would be considered “regular”.

Exactly and your answer is...
I think it does, because it would be paid regularly at the end of each tax year and it has to be out of surplus income. What could be a more accurate way to calculate surplus income by waiting until the end of the tax year to define how much there is.

You’d have to make a few payments for it to be regular. After only one or two years you wouldn’t be able to show that you regularly make the payments. Eg you couldn’t prove that you would always have surplus income.

I’m not sure that’s the case. I’m sure I’ve read a legal case sometime ago that concluded that as long as there was an intention to do something regularly then that was good enough - and this is why you need to ensure your intention is documented.

eskbanker

The test is whether the gift is "made as part of the normal expenditure of the transferor", and is often referred to as 'regular', rather than a one-off lump sum, but there's more detail on interpretation at https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm14243

You must test the whether a gift is ‘normal’ by considering all the relevant factors. These will include the frequency and amount, the nature of the gifts, the identity of those who received them and the reasons for the gifts.

Frequency

Normal does not necessarily mean regular or annual although gifts made on a regular basis are more likely to meet the normality test. In many cases averaging the yearly amount of the transferor’s gifts of a particular type will help to form a fair opinion.

Majic

eskbanker said:

The test is whether the gift is "made as part of the normal expenditure of the transferor", and is often referred to as 'regular', rather than a one-off lump sum, but there's more detail on interpretation at https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm14243

You must test the whether a gift is ‘normal’ by considering all the relevant factors. These will include the frequency and amount, the nature of the gifts, the identity of those who received them and the reasons for the gifts.

Frequency

Normal does not necessarily mean regular or annual although gifts made on a regular basis are more likely to meet the normality test. In many cases averaging the yearly amount of the transferor’s gifts of a particular type will help to form a fair opinion.

There is a contradiction right there. 'Normal does not necessarily mean regular or annual'. But a one off annual amount each year is regular. My theory is that in the first year, it would be ok to have a gift at the end of the year and then once the 'surplus' is established (pattern of income and expenditure each year should be fairly consistent) maybe switch to a monthly frequency and of course leave a buffer as others have mentioned.

silvercar

Majic said:

eskbanker said:

The test is whether the gift is "made as part of the normal expenditure of the transferor", and is often referred to as 'regular', rather than a one-off lump sum, but there's more detail on interpretation at https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm14243

You must test the whether a gift is ‘normal’ by considering all the relevant factors. These will include the frequency and amount, the nature of the gifts, the identity of those who received them and the reasons for the gifts.

Frequency

Normal does not necessarily mean regular or annual although gifts made on a regular basis are more likely to meet the normality test. In many cases averaging the yearly amount of the transferor’s gifts of a particular type will help to form a fair opinion.

There is a contradiction right there. 'Normal does not necessarily mean regular or annual'. But a one off annual amount each year is regular. My theory is that in the first year, it would be ok to have a gift at the end of the year and then once the 'surplus' is established (pattern of income and expenditure each year should be fairly consistent) maybe switch to a monthly frequency and of course leave a buffer as others have mentioned.

How can you prove this if the amount has only been paid for 1 year?

Keep_pedalling

silvercar said:

Majic said:

eskbanker said:

The test is whether the gift is "made as part of the normal expenditure of the transferor", and is often referred to as 'regular', rather than a one-off lump sum, but there's more detail on interpretation at https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm14243

You must test the whether a gift is ‘normal’ by considering all the relevant factors. These will include the frequency and amount, the nature of the gifts, the identity of those who received them and the reasons for the gifts.

Frequency

Normal does not necessarily mean regular or annual although gifts made on a regular basis are more likely to meet the normality test. In many cases averaging the yearly amount of the transferor’s gifts of a particular type will help to form a fair opinion.

There is a contradiction right there. 'Normal does not necessarily mean regular or annual'. But a one off annual amount each year is regular. My theory is that in the first year, it would be ok to have a gift at the end of the year and then once the 'surplus' is established (pattern of income and expenditure each year should be fairly consistent) maybe switch to a monthly frequency and of course leave a buffer as others have mentioned.

How can you prove this if the amount has only been paid for 1 year?

I think if you died within a year of starting this your loved ones would have more to deal with than reducing your IHT liability by a tiny amount.