Regular gifts from excess income and IHT

phlebas192

silvercar said:

phlebas192 said:

Can't access the article, but this feels wrong. These are all standard payments that we should expect to meet and pay for out of income. Valid capital expenditure is the sort of thing that permanently increases another asset. eg an extension to your house permanently increases its value but a new kitchen does not. Cars and boilers have limited lifespans and will need replacing so should be considered normal expenditure. Even a new roof is properly considered maintenance - if it had been adequately maintained then it is unlikely that it would need replacing.

I disagree, many people can’t afford to replace their car/ boiler/ roof from regular income and so resort to using their savings. Hanse the expression ‘rainy day savings’. Budgeting for future expenditure through funding pots also a way of saving for certain big buck items.

The point is that if you are having to use savings (ie capital) to fund purchases then, by definition, you do not have excess income to gift.

There is the "taking one year with another" element so as long as income overall exceeds expenditure, it doesn't have to exceed it every single year. But HMRC's default position will consider savings to be capital after only a couple of years. It might be possible to get around this by documenting a strategy of, eg putting a set amount each year into a "new car" fund, a "home maintenance" fund, etc. But, for sure, just bunging some cash into general savings and then withdrawing it when needed is going to lead to HMRC challenging an attempt to claim that there was excess income in the years when savings were withdrawn.

Keep_pedalling

Sea_Shell said:

Keep_pedalling said:

Sea_Shell said:

Keep_pedalling said:

Is buying a new car a one off purchase if you renew your care on a regular basis, say every 3 years? 

Aren't most frequent renewals done via finance arrangements these days.  PCP etc.

Do many people pay cash every 3 years?

I would have thought cash buyers would be more "buy and keep" sorts.  I know we are 😉

People in IHT territory might very well purchase. I have done so with all my new cars. 

Out of savings or income 😉

Savings, we do not have excess income, just have to try and keep breathing for 7 years to make sure PETS fall out of our estates.

BikingBud

If you can show a record of a running underspend or buffer that increases the savings over a number of years then I would offer that taking one year with another then you have met the test if you withdraw it for those "capital" or big ticket spends, boiler one year, Aston another, Lions or Ashes series away  

Not sure how finance deals would be viewed but if you can maintain records that show that interest gained from savings is more than interest paid on finance and you followed a deliberate approach to allocating your spends in the most efficient manner then that might also suffice.

Whereas if you do not have any demonstrable track of income and normal expenditure then you have not provided sufficient information for anybody who might trying to demonstrate to HMRC that it was excess income. 

MarzipanCrumble

I purchased a new showroom Skoda out of savings - it is a 66 numberplate.   (a) I purchased a new mobile and paid for it by credit finance which I pay off in £20 installments monthly.  (b) I paid for a cat protection fence round a part of my garden on a 0% cc interest I had taken out.  (c) I paid for flight to Australia on regular CC and transferred balance to a 'Balance transfer' CC for 28 months.  

So is a) income; is b) capital in that I wait until last minute to clear it; c) I paid minimum then cleared it at last minute.  

IHT 'gifts' out of excess income is a minefield.  Which is why I keep a detailed spreadsheet and notate it.  Maybe I should be more explicit in my notations.

incus432

This topic keeps coming up here. It is horrendously complicated and chaos will ensue as more and more of us try to use the 'excess income' exemption, and maybe get it wrong.  I feel this comment by @poseidon1 in another thread 'The Dreaded IHT 403' hits the nail on the head.

poseidon1 said:

Reading all these posts and people agonising how to make effective use of this particular exemption, indicates that the annual exemption IHT regime needs a  overhaul and simplification. 

As I indicated in another post, IHT and its predecessor death taxes ( Capital Transfer Tax and death duty ) were devised to catch a very small percentage of the population who were assumed to be more than adequately advised by lawyers and accountants  ( upper middle classes and the 'landed gentry' ). 

 Scroll forward 70 years or so, and we have  a large and growing populace who largely  via house price inflation ( and now pension pots), have been drawn into a very complex tax regime  which many simply are not equipped to deal with, and the general quality of solicitor advice available to this lower market place leaves much to be desired.

So I would sweep away the multitude of IHT exemptions ( small gifts, gifts on marriage, gifts to political parties, excess income , £3000  etc) in favour of 1 single annual exemption of £15,000 to £20,000, together with unlimited very large gifts requiring 7 year survival.

A simple annual exemption of  say £15,000 ( per spouse) to be deployed in anyway they deem fit should be adequate for the bulk of the population, with the exemption rolled over for a year if not used previously. 

£15,000 would also be a far more reasonable sum for singletons with no children of their own where the current available exemptions are very much pitched in favour of the traditional nuclear family.

IHT is long overdue an overhaul and modernisation, and is now simply unfit for a modern populace who do not have the same access to high level  ( expensive ) advice enjoyed by the wealthier upper middle classes. This and other threads  on the complex gifts out of excess income exemption is indicative  of this.

XYZetc

Firstly, extract from Sunday Times 29dec24 was by Kate Aitchinson of Accountancy Firm RSM and I quote relevant section here:
“Big expenditures, such as a new car or house repairs, are likely to be paid for from savings rather than income. The one-off nature would indicate that it is not normal expenditure. HMRC would not regard genuine one-off costs, which do not form part of your normal expenditure, to be included in the calculation of outgoings for the year.”

Secondly, The Martin Lewis Money Show Live 11mar25 at 34:30 Kieran Bowe said that "...even in an exceptional year if your replace the car or buy a new kitchen exceeds surplus for year, you need to deduct those before giving away any surplus income..."

So who to believe?! I recently wrote to HMRC with this same question and they replied: "We cannot give advice, talk to a Financial Advisor"!! Well, the above suggests I could be wasting my money AND still could result in HMRC penalising my inheritors through no fault of my or their own!

The UK tax system is broken. What kind of a country do we live in that - when people are distraught and at their most vulnerable after a death - the Government, who are meant to look after our people, deliberately make the tax system so complicated and impenetrable that HMRC cannot advise and Financial Advisors cannot agree?

Linton

XYZetc said:

Firstly, extract from Sunday Times 29dec24 was by Kate Aitchinson of Accountancy Firm RSM and I quote relevant section here:
“Big expenditures, such as a new car or house repairs, are likely to be paid for from savings rather than income. The one-off nature would indicate that it is not normal expenditure. HMRC would not regard genuine one-off costs, which do not form part of your normal expenditure, to be included in the calculation of outgoings for the year.”

Secondly, The Martin Lewis Money Show Live 11mar25 at 34:30 Kieran Bowe said that "...even in an exceptional year if your replace the car or buy a new kitchen exceeds surplus for year, you need to deduct those before giving away any surplus income..."

So who to believe?! I recently wrote to HMRC with this same question and they replied: "We cannot give advice, talk to a Financial Advisor"!! Well, the above suggests I could be wasting my money AND still could result in HMRC penalising my inheritors through no fault of my or their own!

The UK tax system is broken. What kind of a country do we live in that - when people are distraught and at their most vulnerable after a death - the Government, who are meant to look after our people, deliberately make the tax system so complicated and impenetrable that HMRC cannot advise and Financial Advisors cannot agree?

A country in which there are plenty of "clever" advisors who will search out lucrative opportunities for tax avoidance. So either the rules are extremely complicated to cover all possibilities that are seen at the time (but still possibly with avoidance loopholes) or it is vague with the intentions being clear but it is up to HMRC to give guidance and rulings in particular difficult cases so that the outcome is reasonable.

If the outcome is believed to be unreasonable it is ultimately up to the courts to decide.