Gifts from Income-is this acceptable?

DRS1

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.

This feels contrived so it will probably get scrutinised.
Is it normal expenditure?  How many people give ALL their surplus income away?   OK maybe it is normal for you and you evidence it so your heirs can prove it to HMRC.
One thing they look at is the reason for the gift.  What is your reason?  I got to the end of the year and had spare income so I decided to give it all to someone.  Was it their birthday?  Was it Christmas?  A wedding?  No particular reason?  But avoiding IHT never crossed my mind.
The amounts may vary presumably?  HMRC will be fine with a bit of leeway but what if one year it is suddenly a much higher figure?  Say it is £10k when every other year it was £1k.  They may well say only £1k of the £10K counts,
And what happens if this bank account gets a receipt which is not income?
You may survive all of the above but I think you are going to be making work for your heirs and the question is - is it worthwhile?

Majic

DRS1 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.

This feels contrived so it will probably get scrutinised.
Is it normal expenditure?  How many people give ALL their surplus income away?   OK maybe it is normal for you and you evidence it so your heirs can prove it to HMRC.
One thing they look at is the reason for the gift.  What is your reason?  I got to the end of the year and had spare income so I decided to give it all to someone.  Was it their birthday?  Was it Christmas?  A wedding?  No particular reason?  But avoiding IHT never crossed my mind.
The amounts may vary presumably?  HMRC will be fine with a bit of leeway but what if one year it is suddenly a much higher figure?  Say it is £10k when every other year it was £1k.  They may well say only £1k of the £10K counts,
And what happens if this bank account gets a receipt which is not income?
You may survive all of the above but I think you are going to be making work for your heirs and the question is - is it worthwhile?

Please see my post at 8.09 am this morning on this thread which answers your point about varying amounts. You have to leave a buffer. The reason is to avoid IHT and this is one of the few remaining loopholes available to do that.
With the bank account, you can only include income off this and normal expenditure, so there would be some items to be excluded.

silvercar

DRS1 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.

This feels contrived so it will probably get scrutinised.
Is it normal expenditure?  How many people give ALL their surplus income away?   OK maybe it is normal for you and you evidence it so your heirs can prove it to HMRC.
One thing they look at is the reason for the gift.  What is your reason?  I got to the end of the year and had spare income so I decided to give it all to someone.  Was it their birthday?  Was it Christmas?  A wedding?  No particular reason?  But avoiding IHT never crossed my mind.
The amounts may vary presumably?  HMRC will be fine with a bit of leeway but what if one year it is suddenly a much higher figure?  Say it is £10k when every other year it was £1k.  They may well say only £1k of the £10K counts,
And what happens if this bank account gets a receipt which is not income?
You may survive all of the above but I think you are going to be making work for your heirs and the question is - is it worthwhile?

The reason would be to help your kids out as you have surplus income. How can hmrc demand a reason for a gift? 

fuzzzzy

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.

We received annual gifts from income from my mother in the 2 years before she died. They were maxed out to use up all her surplus income. We were not asked to provide any evidence. As long as you have bank statements to show outgoings and keep evidence of non-taxable income that HMRC won't be aware of then I would not have thought there would be a problem. I believe there was a test case where someone paid out gifts annually after calculating their surplus income and it was deemed within the rules.

DRS1

silvercar said:

DRS1 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.

This feels contrived so it will probably get scrutinised.
Is it normal expenditure?  How many people give ALL their surplus income away?   OK maybe it is normal for you and you evidence it so your heirs can prove it to HMRC.
One thing they look at is the reason for the gift.  What is your reason?  I got to the end of the year and had spare income so I decided to give it all to someone.  Was it their birthday?  Was it Christmas?  A wedding?  No particular reason?  But avoiding IHT never crossed my mind.
The amounts may vary presumably?  HMRC will be fine with a bit of leeway but what if one year it is suddenly a much higher figure?  Say it is £10k when every other year it was £1k.  They may well say only £1k of the £10K counts,
And what happens if this bank account gets a receipt which is not income?
You may survive all of the above but I think you are going to be making work for your heirs and the question is - is it worthwhile?

The reason would be to help your kids out as you have surplus income. How can hmrc demand a reason for a gift? 

According to the Manual HMRC will look at the reason for the gift.
IHTM14243 - Lifetime transfers: conditions for normal out of income exemption: factors to consider - HMRC internal manual - GOV.UK

I don't imagine anyone would actually say the reason for the gift was to avoid IHT even if there is the famous judicial quote that it is every citizen's duty to pay as little tax as possible.

DRS1

fuzzzzy said:

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.

We received annual gifts from income from my mother in the 2 years before she died. They were maxed out to use up all her surplus income. We were not asked to provide any evidence. As long as you have bank statements to show outgoings and keep evidence of non-taxable income that HMRC won't be aware of then I would not have thought there would be a problem. I believe there was a test case where someone paid out gifts annually after calculating their surplus income and it was deemed within the rules.

That is interesting and I am sure a great comfort to the OP.
Do you have any idea of the name of the test case?   It would be useful for the OP (and anyone else who wants to do this sort of thing) to know the basis for HMRC's attack on what was done and to see if there are any judge's comments on how to do it right.

DRS1

[Deleted User] said:

See my comments in bold below:

DRS1 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.

This feels contrived so it will probably get scrutinised.  It is contrived (in that the situation didn't just happen naturally) but that doesn't stop this exemption being available.  I hope HMRC do scrutinise this sort of thing to stop people randomly claiming exemptions that are not available.  If HMRC scrutinise something and your executors have contemporaneous evidence then HMRC will generally be happy.  For completeness if there was some quid pro quo then other tax rules might apply (e.g. here's £100 but give it back to me when I ask for it).

Is it normal expenditure? That's a question of fact where contemporaneous evidence comes in fancy.

How many people give ALL their surplus income away?  Who cares?  Nothing in the legislation about what other people do.  I don't think the legislation says it has to be normal for you as an individual, though I think HMRC say it.  The legislation talks about normal expenditure out of income.  Sitting down and working out how much spare income you have so that you can give it away on a monthly basis is not normal (although I suppose more people may start doing it now).  

OK maybe it is normal for you and you evidence it so your heirs can prove it to HMRC. Spot on.

One thing they look at is the reason for the gift.  What is your reason?  I got to the end of the year and had spare income so I decided to give it all to someone.  Was it their birthday?  Was it Christmas?  A wedding?  No particular reason?  But avoiding IHT never crossed my mind.  IHT can be very much the focus of a gift and IHT exemptions can be the basis for calculating the quantum of gifts.  That's absolutely fine.  Having other reasons beyond being generous and beyond IHT might be a great way of explaining why the gifts are normal income (e.g. my granddaughter has had a baby, her partner has lost his job, I see that they have a need and so will give them £500 per month via standing order).  Other reasons might show why the expenditure is not normal.  But trying to save IHT is neither here-nor-there. But having it as a reason for the gift is going to be a red rag to the HMRC bull

The amounts may vary presumably?  Yep.  For a lot of people it will vary (pay rises, lower interest rates, the shower leaks, etc).  That's still normal.  If I have a settled intention of giving away the whole of my surplus then I fully expect the amount of the gifts to vary.  It would look dodgy if they didn't.

 HMRC will be fine with a bit of leeway but what if one year it is suddenly a much higher figure?  I have no idea what you mean by "fine with a bit of leeway".  I was merely paraphrasing from the IHT manual -The amount of the gift is an important factor. The gifts must be comparable in size although you do not need to query small differences.

HMRC will apply the law.  If the effect of the gifts is that there is more normal expenditure over income (taking one year with another) then the excess won't qualify for the exemption.  There is no leeway there.  However, there is no fixed answer to how long before accumulated income becomes capital.  HMRC have published their views about two years but that's just their view. At some stage there will be another court case about this if both parties think it is worthwhile.  Not what I was talking about.  The OP is doing this annually (or now monthly)  I don't think he is going to be accumulating income - quite the reverse

Say it is £10k when every other year it was £1k.  They may well say only £1k of the £10K counts,  If your settled policy if to gift the entire surplus, why would the position be different if the surplus were £1k one year, £10k another year.  It's the same settled intention. OK HMRC do seem to contemplate something similar "Sometimes, gifts may be made by reference to a source of income that is by its nature variable in amount, for example annual dividends from company shares"  What I was referencing was the next bit which says "If a particular gift is in a different category from those which are normal because of its size, further evidence will be needed to see if and how it fits in with the normal pattern. In some cases an unusually high figure may be treated as including an amount that would be normal. The part of the gift that is treated as normal will be exempt and the remaining amount, above the normal part, will not qualify for the exemption."

Make sure you retain contemporaneous evidence (e.g. a spreadsheet) for your executors.

And what happens if this bank account gets a receipt which is not income?  Then it's not income and is ignored as far as this exemption is concerned - so make sure that your spreadsheet deals with that.

You may survive all of the above but I think you are going to be making work for your heirs and the question is - is it worthwhile?  Someone with £10k of surplus income per year would gifts their kids/grandchildren/whoever £10k per year.  If I were to ask the average child/grandchild whether they would want to be gifted (i) nothing per year or (ii) £10k per year, I think I know the answer.  Then you get the IHT savings.  If the estate is large enough, this saves IHT of £4,000 to £6,000 per year.  Over, say, a thirty year retirement £10,000 per year soon adds up.    And they can be grateful that there has already been a test case on the point so that they are not it.

I will try to reply in italics

silvercar

DRS1 said:

fuzzzzy said:

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.

We received annual gifts from income from my mother in the 2 years before she died. They were maxed out to use up all her surplus income. We were not asked to provide any evidence. As long as you have bank statements to show outgoings and keep evidence of non-taxable income that HMRC won't be aware of then I would not have thought there would be a problem. I believe there was a test case where someone paid out gifts annually after calculating their surplus income and it was deemed within the rules.

That is interesting and I am sure a great comfort to the OP.
Do you have any idea of the name of the test case?   It would be useful for the OP (and anyone else who wants to do this sort of thing) to know the basis for HMRC's attack on what was done and to see if there are any judge's comments on how to do it right.

A couple of cases quoted in this article, I haven’t had time to track them down and read them, but they are quoted there.

https://www.taxadvisermagazine.com/article/normal-expenditure-out-income-exemption

DRS1

silvercar said:

DRS1 said:

fuzzzzy said:

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.

We received annual gifts from income from my mother in the 2 years before she died. They were maxed out to use up all her surplus income. We were not asked to provide any evidence. As long as you have bank statements to show outgoings and keep evidence of non-taxable income that HMRC won't be aware of then I would not have thought there would be a problem. I believe there was a test case where someone paid out gifts annually after calculating their surplus income and it was deemed within the rules.

That is interesting and I am sure a great comfort to the OP.
Do you have any idea of the name of the test case?   It would be useful for the OP (and anyone else who wants to do this sort of thing) to know the basis for HMRC's attack on what was done and to see if there are any judge's comments on how to do it right.

A couple of cases quoted in this article, I haven’t had time to track them down and read them, but they are quoted there.

I don't see the article.

silvercar

DRS1 said:

silvercar said:

DRS1 said:

fuzzzzy said:

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.

We received annual gifts from income from my mother in the 2 years before she died. They were maxed out to use up all her surplus income. We were not asked to provide any evidence. As long as you have bank statements to show outgoings and keep evidence of non-taxable income that HMRC won't be aware of then I would not have thought there would be a problem. I believe there was a test case where someone paid out gifts annually after calculating their surplus income and it was deemed within the rules.

That is interesting and I am sure a great comfort to the OP.
Do you have any idea of the name of the test case?   It would be useful for the OP (and anyone else who wants to do this sort of thing) to know the basis for HMRC's attack on what was done and to see if there are any judge's comments on how to do it right.

A couple of cases quoted in this article, I haven’t had time to track them down and read them, but they are quoted there.

I don't see the article.

iPad not performing well. 

https://www.taxadvisermagazine.com/article/normal-expenditure-out-income-exemption