IHT exemption - confusion over regular gifts of surplus income

wtiasa1997

My wife & I are in our late 50s & are both retired with two non-dependant adult children. We have mirror wills which leave our estate on the first death to each other and on the second death it goes to our children equally.

Our current joint net annual income is sufficient to meet all regular monthly outgoings such as gas & electricity, council tax, insurance policies, food shopping, petrol and other regular household bills. However, each month over & above this we will have varying amounts on our credit card that we pay off in full. There is no uniform pattern to the amounts or what goes on the credit card each month - one month we may have birthday gifts on it, another we might buy something for the house, and another month we may have restaurant meals, purchases from Amazon and so on. We clear the full credit card balance each month by dipping into capital savings.

I have an income drawdown pension pot from which I currently take monthly withdrawals of £1,000 gross per month. There is sufficient scope in the pension pot to increase withdrawals from their current level if I wanted to do so. Due to the size of my pension pot when added to our other savings, investments and the value of our house, as it stands our children are going to have a not insignificant IHT bill to pay on the second death of my wife & I assuming this happens after April 2027 when my pension pot will fall into the estate for IHT calculation purposes.  

As I am currently only withdrawing £1,000 per month from my income drawdown pot, I would ideally like to increase these withdrawals to £3,000 gross per month & pass the additional net amounts in excess of £1,000 per month to our children on a monthly basis. I would like these amounts to be treated as regular gifts of surplus income in order to be IHT efficient.

I am aware of the IHT403 form from HMRC and the section on it relating to gifts made as part of normal expenditure out of income. Under the expenditure part of that section, the headings for each tax year are - Mortgages, Insurance, Household bills, Council Tax, Travelling costs, Entertainment, Holidays, Nursing home fees, and 'Other'. It would therefore seem sensible to me if I propose making regular monthly gifts to my children to keep a record of income and expenditure each tax year in line with the headings on the IHT403 form.

My questions are - 

1. If my wife and I's current joint net income covers all regular monthly outgoings as detailed in paragraph 2 above, but we have an additional credit card bill to pay each month to meet a variety of "extras" that are not repeated on a month by month basis, is it allowable to pay off the credit card from capital savings each month and still satisfy the regular gifts out of surplus income IHT exemption if I wanted to pass the monetary value of increased pension income withdrawals to our children?

2. Under the 'Holidays' section of the IHT403 form, does this mean the cost of each holiday booking or are you meant to also account for what you spend on holiday once you get there? 

3. Do you need to have surplus income that exceeds the amount of any gift given on a year to year basis to justify the IHT exemption, or if you are making a series of regular gifts will HMRC look at the total surplus income over a number of years versus the total amount of the gifts over the same period?  

4. What type of things do HMRC expect to be included in the 'Other' expenditure box on the IHT403 form?

5. In HMRC IHTM14231 it states that '...Gifts, even made out of income, will not qualify for exemption if the transferor had to resort to capital to meet their normal living expenses.....' What constitutes 'normal living expenses'?

6. In IHTM14231 it also states '....The transferor must have been left with enough income to maintain their usual standard of living...' Again, what constitutes 'usual standard of living'? 

Sorry for the length of the post, but I am totally confused as to how the IHT exemption for regular gifts out of surplus income works in practice and, if I were to make a series of regular monthly gifts to my children for a period of say 4 - 5 years by increasing my monthly pension income drawdown withdrawals, the circumstances where HMRC would not exempt these under the regular gifts of surplus income regulations. 

Any simplification or help anyone can give on any of the questions above would be greatly appreciated!                

   

          

      

    

Keep_pedalling

If you are dipping into capital to pay for things like meals and Amazon purchases it sounds like you don’t have any excess income. The exemption is designed to avoid said excess income from increasing your capital and consequently your potential IHT liability, not actually reduce existing capital.

How much do you have in your pension pot? If it is not very big and increasing the amount of drawdown  is going to exhaust the fund in a few years this’s would not be a wise move. 

You are both quite young so if your assets exceed £1M then you may be better off using other methods to reduce your potencial IHT liabilities. Make sure you use your annual £3k exemptions, if your children have weddings plans jointly gift them another £10k to use the gift in contemplation of marriage exemption. Make larger gifts that will fall out of your estate in 7 years (PETs). You can cover any IHT on failed PETs with term insurence which unless you have any serious health issues will be cheap at your age.

silvercar

Keep_pedalling said:

If you are dipping into capital to pay for things like meals and Amazon purchases it sounds like you don’t have any excess income. The exemption is designed to avoid said excess income from increasing your capital and consequently your potential IHT liability, not actually reduce existing capital.

How much do you have in your pension pot? If it is not very big and increasing the amount of drawdown  is going to exhaust the fund in a few years this’s would not be a wise move. 

You are both quite young so if your assets exceed £1M then you may be better off using other methods to reduce your potencial IHT liabilities. Make sure you use your annual £3k exemptions, if your children have weddings plans jointly gift them another £10k to use the gift in contemplation of marriage exemption. Make larger gifts that will fall out of your estate in 7 years (PETs). You can cover any IHT on failed PETs with term insurence which unless you have any serious health issues will be cheap at your age.

Weddings are an interesting one. Traditionally parents paid for the weddings of their children, even today parents may make a large contribution to the wedding costs. Also wedding invites are often written as coming from the parents. Wouldn’t they therefore be the parent’s expenditure? I thought the gifts for weddings exemption was for gifts made to the young couple, not for wedding costs.

Keep_pedalling

silvercar said:

Keep_pedalling said:

If you are dipping into capital to pay for things like meals and Amazon purchases it sounds like you don’t have any excess income. The exemption is designed to avoid said excess income from increasing your capital and consequently your potential IHT liability, not actually reduce existing capital.

How much do you have in your pension pot? If it is not very big and increasing the amount of drawdown  is going to exhaust the fund in a few years this’s would not be a wise move. 

You are both quite young so if your assets exceed £1M then you may be better off using other methods to reduce your potencial IHT liabilities. Make sure you use your annual £3k exemptions, if your children have weddings plans jointly gift them another £10k to use the gift in contemplation of marriage exemption. Make larger gifts that will fall out of your estate in 7 years (PETs). You can cover any IHT on failed PETs with term insurence which unless you have any serious health issues will be cheap at your age.

Weddings are an interesting one. Traditionally parents paid for the weddings of their children, even today parents may make a large contribution to the wedding costs. Also wedding invites are often written as coming from the parents. Wouldn’t they therefore be the parent’s expenditure? I thought the gifts for weddings exemption was for gifts made to the young couple, not for wedding costs.

Traditionally weddings were paid for by the brides parents but I don’t think that happens too much these days, although for the traditionalists out there, if you are paying for the wedding I think it would be safe to class this as capital expenditure rather than a gift. 

wtiasa1997

Keep_pedalling said:

If you are dipping into capital to pay for things like meals and Amazon purchases it sounds like you don’t have any excess income. The exemption is designed to avoid said excess income from increasing your capital and consequently your potential IHT liability, not actually reduce existing capital.

How much do you have in your pension pot? If it is not very big and increasing the amount of drawdown  is going to exhaust the fund in a few years this’s would not be a wise move. 

You are both quite young so if your assets exceed £1M then you may be better off using other methods to reduce your potencial IHT liabilities. Make sure you use your annual £3k exemptions, if your children have weddings plans jointly gift them another £10k to use the gift in contemplation of marriage exemption. Make larger gifts that will fall out of your estate in 7 years (PETs). You can cover any IHT on failed PETs with term insurence which unless you have any serious health issues will be cheap at your age.

Keep_pedalling - Thanks very much for taking the time to reply and for posting helpful comments. 

Taking larger income drawdown withdrawals is not going to cause issues as I am fortunate to have a very substantial pension pot. In fact, the reason I am looking at increasing withdrawals and then gifting the increased amounts to my children is that assuming even very modest long term investment growth on my pension fund will mean that my pension pot will grow larger relative to the current withdrawals I am taking & this will just add to the IHT liability post April 2027.

My primary confusion is still around what the Revenue mean by "must have been left with enough income (after gifts) to maintain their usual standard of living" and "gifts will not qualify for exemption if the transferor had to resort to capital to meet their normal living expenses."

I don't get what is meant by "usual standard of living" and "normal living expenses." 

Would I be expected by HMRC to forensically go through every purchase I make to decide whether that purchase should be deemed to be part of my usual standard of living or normal living expenses before deciding whether any regular gifts could be treated as coming from surplus income? If I dip into capital to buy say a £100 pair of headphones from Amazon, then would HMRC claim that the cost of the headphones should be met by income and not capital? I am perhaps overcomplicating this but I just don't get it.          

poseidon1

wtiasa1997 said:

Keep_pedalling said:

If you are dipping into capital to pay for things like meals and Amazon purchases it sounds like you don’t have any excess income. The exemption is designed to avoid said excess income from increasing your capital and consequently your potential IHT liability, not actually reduce existing capital.

How much do you have in your pension pot? If it is not very big and increasing the amount of drawdown  is going to exhaust the fund in a few years this’s would not be a wise move. 

You are both quite young so if your assets exceed £1M then you may be better off using other methods to reduce your potencial IHT liabilities. Make sure you use your annual £3k exemptions, if your children have weddings plans jointly gift them another £10k to use the gift in contemplation of marriage exemption. Make larger gifts that will fall out of your estate in 7 years (PETs). You can cover any IHT on failed PETs with term insurence which unless you have any serious health issues will be cheap at your age.

Keep_pedalling - Thanks very much for taking the time to reply and for posting helpful comments. 

Taking larger income drawdown withdrawals is not going to cause issues as I am fortunate to have a very substantial pension pot. In fact, the reason I am looking at increasing withdrawals and then gifting the increased amounts to my children is that assuming even very modest long term investment growth on my pension fund will mean that my pension pot will grow larger relative to the current withdrawals I am taking & this will just add to the IHT liability post April 2027.

My primary confusion is still around what the Revenue mean by "must have been left with enough income (after gifts) to maintain their usual standard of living" and "gifts will not qualify for exemption if the transferor had to resort to capital to meet their normal living expenses."

I don't get what is meant by "usual standard of living" and "normal living expenses." 

Would I be expected by HMRC to forensically go through every purchase I make to decide whether that purchase should be deemed to be part of my usual standard of living or normal living expenses before deciding whether any regular gifts could be treated as coming from surplus income? If I dip into capital to buy say a £100 pair of headphones from Amazon, then would HMRC claim that the cost of the headphones should be met by income and not capital? I am perhaps overcomplicating this but I just don't get it.          

If your pension pot is substantial and potentially subject to a large Iht bill, instead of increasing your rate of withdrawal to provide the basis for for a surplus income exemption claim, you could consider a large tax free cash withdrawal up to your 25% limit and make a substantial one off potentially exempt transfer  ( PET) to the kids.

Of course you would then need to survive 7 years for the gift to be fully exempt, but you could hedge your bets  by gifting  half of the TFC to spouse so that she then gifts on to the children. 

Trying to navigate the complex book keeping and records maintaineance to assist in a successful claim for the gifts out of income exemption is actually quite onerous ( there are some long forum threads on the subject). So opting for you each using your annual £3000 exemptions coupled with a large one off PET could potentially achieve your objectives with far less complexity and over a shorter time span.

wtiasa1997

poseidon1 said:

wtiasa1997 said:

Keep_pedalling said:

If you are dipping into capital to pay for things like meals and Amazon purchases it sounds like you don’t have any excess income. The exemption is designed to avoid said excess income from increasing your capital and consequently your potential IHT liability, not actually reduce existing capital.

How much do you have in your pension pot? If it is not very big and increasing the amount of drawdown  is going to exhaust the fund in a few years this’s would not be a wise move. 

You are both quite young so if your assets exceed £1M then you may be better off using other methods to reduce your potencial IHT liabilities. Make sure you use your annual £3k exemptions, if your children have weddings plans jointly gift them another £10k to use the gift in contemplation of marriage exemption. Make larger gifts that will fall out of your estate in 7 years (PETs). You can cover any IHT on failed PETs with term insurence which unless you have any serious health issues will be cheap at your age.

Keep_pedalling - Thanks very much for taking the time to reply and for posting helpful comments. 

Taking larger income drawdown withdrawals is not going to cause issues as I am fortunate to have a very substantial pension pot. In fact, the reason I am looking at increasing withdrawals and then gifting the increased amounts to my children is that assuming even very modest long term investment growth on my pension fund will mean that my pension pot will grow larger relative to the current withdrawals I am taking & this will just add to the IHT liability post April 2027.

My primary confusion is still around what the Revenue mean by "must have been left with enough income (after gifts) to maintain their usual standard of living" and "gifts will not qualify for exemption if the transferor had to resort to capital to meet their normal living expenses."

I don't get what is meant by "usual standard of living" and "normal living expenses." 

Would I be expected by HMRC to forensically go through every purchase I make to decide whether that purchase should be deemed to be part of my usual standard of living or normal living expenses before deciding whether any regular gifts could be treated as coming from surplus income? If I dip into capital to buy say a £100 pair of headphones from Amazon, then would HMRC claim that the cost of the headphones should be met by income and not capital? I am perhaps overcomplicating this but I just don't get it.          

If your pension pot is substantial and potentially subject to a large Iht bill, instead of increasing your rate of withdrawal to provide the basis for for a surplus income exemption claim, you could consider a large tax free cash withdrawal up to your 25% limit and make a substantial one off potentially exempt transfer  ( PET) to the kids.

Of course you would then need to survive 7 years for the gift to be fully exempt, but you could hedge your bets  by gifting  half of the TFC to spouse so that she then gifts on to the children. 

Trying to navigate the complex book keeping and records maintaineance to assist in a successful claim for the gifts out of income exemption is actually quite onerous ( there are some long forum threads on the subject). So opting for you each using your annual £3000 exemptions coupled with a large one off PET could potentially achieve your objectives with far less complexity and over a shorter time span.

Thanks. I take your point about using annual £3,000 exemptions & a large one off PET being more simplistic, but my pension pot is already fully in drawdown as the maximum 25% TFC was taken a few years ago. 

 

I could potentially make a PET out of savings/investments but my preferred option was to utilise the gifts out of surplus income exemption by upping my regular pension withdrawals and passing the excess to my children. That way I retain access to my savings/investments but get the excess regular pension income out of my estate. However, if it is going to be complex to maintain records & book keeping to substantiate a claim then perhaps I need to think again.       

poseidon1

wtiasa1997 said:

poseidon1 said:

wtiasa1997 said:

Keep_pedalling said:

If you are dipping into capital to pay for things like meals and Amazon purchases it sounds like you don’t have any excess income. The exemption is designed to avoid said excess income from increasing your capital and consequently your potential IHT liability, not actually reduce existing capital.

How much do you have in your pension pot? If it is not very big and increasing the amount of drawdown  is going to exhaust the fund in a few years this’s would not be a wise move. 

You are both quite young so if your assets exceed £1M then you may be better off using other methods to reduce your potencial IHT liabilities. Make sure you use your annual £3k exemptions, if your children have weddings plans jointly gift them another £10k to use the gift in contemplation of marriage exemption. Make larger gifts that will fall out of your estate in 7 years (PETs). You can cover any IHT on failed PETs with term insurence which unless you have any serious health issues will be cheap at your age.

Keep_pedalling - Thanks very much for taking the time to reply and for posting helpful comments. 

Taking larger income drawdown withdrawals is not going to cause issues as I am fortunate to have a very substantial pension pot. In fact, the reason I am looking at increasing withdrawals and then gifting the increased amounts to my children is that assuming even very modest long term investment growth on my pension fund will mean that my pension pot will grow larger relative to the current withdrawals I am taking & this will just add to the IHT liability post April 2027.

My primary confusion is still around what the Revenue mean by "must have been left with enough income (after gifts) to maintain their usual standard of living" and "gifts will not qualify for exemption if the transferor had to resort to capital to meet their normal living expenses."

I don't get what is meant by "usual standard of living" and "normal living expenses." 

Would I be expected by HMRC to forensically go through every purchase I make to decide whether that purchase should be deemed to be part of my usual standard of living or normal living expenses before deciding whether any regular gifts could be treated as coming from surplus income? If I dip into capital to buy say a £100 pair of headphones from Amazon, then would HMRC claim that the cost of the headphones should be met by income and not capital? I am perhaps overcomplicating this but I just don't get it.          

If your pension pot is substantial and potentially subject to a large Iht bill, instead of increasing your rate of withdrawal to provide the basis for for a surplus income exemption claim, you could consider a large tax free cash withdrawal up to your 25% limit and make a substantial one off potentially exempt transfer  ( PET) to the kids.

Of course you would then need to survive 7 years for the gift to be fully exempt, but you could hedge your bets  by gifting  half of the TFC to spouse so that she then gifts on to the children. 

Trying to navigate the complex book keeping and records maintaineance to assist in a successful claim for the gifts out of income exemption is actually quite onerous ( there are some long forum threads on the subject). So opting for you each using your annual £3000 exemptions coupled with a large one off PET could potentially achieve your objectives with far less complexity and over a shorter time span.

Thanks. I take your point about using annual £3,000 exemptions & a large one off PET being more simplistic, but my pension pot is already fully in drawdown as the maximum 25% TFC was taken a few years ago. 

 

I could potentially make a PET out of savings/investments but my preferred option was to utilise the gifts out of surplus income exemption by upping my regular pension withdrawals and passing the excess to my children. That way I retain access to my savings/investments but get the excess regular pension income out of my estate. However, if it is going to be complex to maintain records & book keeping to substantiate a claim then perhaps I need to think again.       

Fair point about have already accessed your TFC.

However, the administration, record keeping and ensuring you stay within HMRCs sometimes nebulous definition of what  constitutes 'excess income' ,  is indeed complex and would require a substantial commitment by you  ( year by year ) to ensure your executors had the proper ammunition to launch a successful claim for the relief when the time comes. Worth thinking again,  about the simpler PETs and £3,000  annual exemptions option.

hoogie_doogie

Hello, I have questions about gifting for our children. Firstly the £3000 gifting allowance. Does that apply to my wife and I jointly or can each of us gift £3000 separately, although all or cash is in joint accounts?
My next question is, aside from gifting can we buy our children furniture or white goods for their home, or pay for window replacements for example without being penalised?

Nomunnofun1

hoogie_doogie said:

Hello, I have questions about gifting for our children. Firstly the £3000 gifting allowance. Does that apply to my wife and I jointly or can each of us gift £3000 separately, although all or cash is in joint accounts?
My next question is, aside from gifting can we buy our children furniture or white goods for their home, or pay for window replacements for example without being penalised?

It’s £3000 each plus £3000 each if exemption not used last year. What is the potential value of your estate?

In what way do you believe that you can be penalised?

hoogie_doogie

Our estate is approximately £500000. I really want to know if I can pay for our child’s h doors and windows at her home.