Gifting from excess Income

thingswerentthisbadinmyday

morning all,
My wife and I are in the fortunate position of having a modest amount of day-to-day surplus income and we’re looking at the possibility of gifting under the “excess income” rules.
Although I’ve read forum posts and relevant HMRC on-line info (or at least tried to), I have some questions which I’ve been unable to answer;
First, large ticket purchase - probably the most common is car purchase. Is this or is this not considered ‘normal expenditure’ by HMRC for the purposes of calculating excess income? I have tried, but failed miserably, to answer this. My assumption is most private car purchasers don’t have a chunk of cash sitting around (or if they do, it’s probably been saved over a period of time) and in many cases, the norm is to pay for a new car on monthly finance. If you buy a used car for, say, £15k, surely you’re not expected to deduct the full £15k from that year’s “surplus income”?
Second - I have a daughter and grandchildren living overseas. I have an on-line account which allows me to buy and hold small amounts of Australian dollars, so that I can make payments as and when I wish. I try to top this up when the rates are in my favour; running the balance down when the rates go the other way. Can anyone forsee a problem with my using this accumulated balance to make gifts of, say, $200 per month and still qualify under the “gifting from excess income” rule?
Thanks for any thoughts.

Flugelhorn

I don't know the proper answer to this about the car and would love some clarity - 


maybe"normal expenditure" might include putting money away for a replacement car each year and considering that "normal expenditure" - similarly putting money away for house maintenance etc, so presume savings go up in those years and then can be spent in one go on a car.  Maybe HMRC would expect to see that gifts were only given after savings for such things have been made 

Will be interested to see the answer as DH wants a secondhand Bentley and it would have to come out of capital and I need to be sure it isn't affecting gifts from excess income. Similarly if you wanted a round the world cruise and could pay for it out of capital. Or maybe that isn't normal expenditure? 

Keep_pedalling

How often do you change cars? If it’s every two years then that might be classed as expenditure, buy new and drive it til it is clapped out then it would be capital spend. The rules on this are somewhat blurred. The same with very expensive holidays.

It does not matter where the people you are gifting to live. It might be cheaper in terms of currency conversion costs to make annual gifts rather than monthly ones. 

This exemption is designed to prevent your excess income increasing your IHT liability so it is not worth the hassle if your joint net worth is currently below your exemptions (£1M). If your net worth is well over £1M and you only have very modest excess income then you should be looking at options that actually reduce your excess income. Use both your  £3k annual exemptions every year, make one off larger gifts, cover the possibility of not surviving 7 years after major gifts with term insurance. 

thingswerentthisbadinmyday

Keep_pedalling said:

……….The rules on this are somewhat blurred.

Thank you for such a detailed reply.
Although I agree with this 100%, I simply don’t understand why the authorities cannot give absolute clarity on questions like this (unless there is clarity somewhere and I simply haven’t found it yet).
Re your second point - value of joint estate - thank you. No, we’re not over £1m and unless the property market explodes, then we’re unlikely to reach that figure. I guess that in contemplating making use of the ‘gift from excess income’ rules, I was looking to take advantage of every legitimate avenue available to us (at least for as long as it remains available). 
Thanks again.

Keep_pedalling

thingswerentthisbadinmyday said:

Keep_pedalling said:

……….The rules on this are somewhat blurred.

Thank you for such a detailed reply.
Although I agree with this 100%, I simply don’t understand why the authorities cannot give absolute clarity on questions like this (unless there is clarity somewhere and I simply haven’t found it yet).
Re your second point - value of joint estate - thank you. No, we’re not over £1m and unless the property market explodes, then we’re unlikely to reach that figure. I guess that in contemplating making use of the ‘gift from excess income’ rules, I was looking to take advantage of every legitimate avenue available to us (at least for as long as it remains available). 
Thanks again.

For you there is no real advantage in complicating your financial affairs by using this exemption, just use your annual exemption that allows you to make joint gifts of £6,000 per year, and if you are feeling flush make one off larger gifts. 

probate_slave

I simply don’t understand why the authorities cannot give absolute clarity on questions like this (unless there is clarity somewhere and I simply haven’t found it yet).

Unfortunately the vagueness is in the 1984 Inheritance Act itself

https://www.legislation.gov.uk/ukpga/1984/51/section/21

so its interpretation is down to whichever technical officer handles the IHT return.

More detailed guidance in the manual (from IHTM14231 onwards) suggests to me that a car can be bought out of capital:

"Although the normal expenditure gifts must have left the transferor with ‘sufficient income’ to maintain their usual standard of living, they do not need to have actually used this for living expenses. The transferor may in fact choose to use capital to meet their living expenses and use the income remaining, after making the gifts, for some other purpose. It is enough, for the exemption to apply, that the income was enough to meet both the normal expenditure gifts and the usual living expenses." IHTM14255

thingswerentthisbadinmyday

probate_slave said:

I simply don’t understand why the authorities cannot give absolute clarity on questions like this (unless there is clarity somewhere and I simply haven’t found it yet).

Unfortunately the vagueness is in the 1984 Inheritance Act itself

https://www.legislation.gov.uk/ukpga/1984/51/section/21

so its interpretation is down to whichever technical officer handles the IHT return.

Thank you for taking the time to reply.
I am appalled, but not surprised, that it comes down to someone’s interpretation of the rules.

Keep_pedalling

thingswerentthisbadinmyday said:

probate_slave said:

I simply don’t understand why the authorities cannot give absolute clarity on questions like this (unless there is clarity somewhere and I simply haven’t found it yet).

Unfortunately the vagueness is in the 1984 Inheritance Act itself

https://www.legislation.gov.uk/ukpga/1984/51/section/21

so its interpretation is down to whichever technical officer handles the IHT return.

Thank you for taking the time to reply.
I am appalled, but not surprised, that it comes down to someone’s interpretation of the rules.

I think now with more people on DC pensions and SIPPs defining what income is more difficult than it used to be, I think the only way to provide absolute clarity is to do away with this particular exemption and to increase the anusl exemption to compensate.