IHT - gifts out of surplus income - husband & wife pooling all income & expenses - evidence required

Doc_N

Having dug around for an answer to this, I’m afraid I’m stumped. It keeps cropping up in various places, but no one seems to have the definitive answer.

This situation involves a husband and wife who share all income and expenses absolutely equally. All income goes into joint accounts, and all expenses go out of joint accounts. No one person regards him or herself as ‘owning’ more than the other, because everything is pooled. However the facts are that the husband does earn more than the wife and each person is of course a separate entity for IHT.

Logically, and most simply, the surplus available to remove from the ambit of IHT as gifts out of surplus income would be the total joint income, after tax, less total joint expenditure. Excluding capital receipts and outgoings of course.

But I’m guessing HMRC would not be happy after the first death, or the second for that matter, with that simple approach? Form IHT403 contains a spreadsheet of income and expenditure, and each death needs a separate one. Perhaps HMRC would deem it reasonable to take the actual income of each, but split all the expenses down the middle? Or would it be possible just to lump all the income together, deduct all the expenditure and regard the excess as available for both parties to gift jointly, aggregating the gifts together as well?

The HMRC Inheritance Tax manual doesn’t cover this issue, so I’m guessing there’s no question of just using a ‘pooled’ surplus, but has anyone any direct experience of what approach they actually take in what must be a relatively common situation?

poseidon1

Doc_N said:

Having dug around for an answer to this, I’m afraid I’m stumped. It keeps cropping up in various places, but no one seems to have the definitive answer.

This situation involves a husband and wife who share all income and expenses absolutely equally. All income goes into joint accounts, and all expenses go out of joint accounts. No one person regards him or herself as ‘owning’ more than the other, because everything is pooled. However the facts are that the husband does earn more than the wife and each person is of course a separate entity for IHT.

Logically, and most simply, the surplus available to remove from the ambit of IHT as gifts out of surplus income would be the total joint income, after tax, less total joint expenditure. Excluding capital receipts and outgoings of course.

But I’m guessing HMRC would not be happy after the first death, or the second for that matter, with that simple approach? Form IHT403 contains a spreadsheet of income and expenditure, and each death needs a separate one. Perhaps HMRC would deem it reasonable to take the actual income of each, but split all the expenses down the middle? Or would it be possible just to lump all the income together, deduct all the expenditure and regard the excess as available for both parties to gift jointly, aggregating the gifts together as well?

The HMRC Inheritance Tax manual doesn’t cover this issue, so I’m guessing there’s no question of just using a ‘pooled’ surplus, but has anyone any direct experience of what approach they actually take in what must be a relatively common situation?

The reality is that IHT reliefs and exemptions are available to individuals, not to couples on a joint basis.

When looking at the gifts out of excess  income exemption, one needs to look at the level of income each are contributing to joint account to determine who has the 'excess' to justify the annual gifts.

If in reality there is a wide disparity in the income of one spouse compared to the other, then it is more than likely that the bulk ( or entirety )  of excess income gifting is  coming from the spouse with the higher income and little or nothing from the lower income spouse.

In effect therefore, if you prepare separate IHT 403s for each spouse with their actual income  each year ( but expenses halved), this should confirm who really has the excess income to justify the annual gifts.

In  many the cases this would reveal the lower income spouse is actually being subsidised by the higher income spouse and could not afford their half share of expenses on their own income and therefore  are operating an annual deficit for the purposes of the exemption.

Doc_N

poseidon1 said:

Doc_N said:

Having dug around for an answer to this, I’m afraid I’m stumped. It keeps cropping up in various places, but no one seems to have the definitive answer.

This situation involves a husband and wife who share all income and expenses absolutely equally. All income goes into joint accounts, and all expenses go out of joint accounts. No one person regards him or herself as ‘owning’ more than the other, because everything is pooled. However the facts are that the husband does earn more than the wife and each person is of course a separate entity for IHT.

Logically, and most simply, the surplus available to remove from the ambit of IHT as gifts out of surplus income would be the total joint income, after tax, less total joint expenditure. Excluding capital receipts and outgoings of course.

But I’m guessing HMRC would not be happy after the first death, or the second for that matter, with that simple approach? Form IHT403 contains a spreadsheet of income and expenditure, and each death needs a separate one. Perhaps HMRC would deem it reasonable to take the actual income of each, but split all the expenses down the middle? Or would it be possible just to lump all the income together, deduct all the expenditure and regard the excess as available for both parties to gift jointly, aggregating the gifts together as well?

The HMRC Inheritance Tax manual doesn’t cover this issue, so I’m guessing there’s no question of just using a ‘pooled’ surplus, but has anyone any direct experience of what approach they actually take in what must be a relatively common situation?

The reality is that IHT reliefs and exemptions are available to individuals, not to couples on a joint basis.

When looking at the gifts out of excess  income exemption, one needs to look at the level of income each are contributing to joint account to determine who has the 'excess' to justify the annual gifts.

If in reality there is a wide disparity in the income of one spouse compared to the other, then it is more than likely that the bulk ( or entirety )  of excess income gifting is  coming from the spouse with the higher income and little or nothing from the lower income spouse.

In effect therefore, if you prepare separate IHT 403s for each spouse with their actual income  each year ( but expenses halved), this should confirm who really has the excess income to justify the annual gifts.

In  many the cases this would reveal the lower income spouse is actually being subsidised by the higher income spouse and could not afford their half share of expenses on their own income and therefore  are operating an annual deficit for the purposes of the exemption.

That makes perfect sense - thanks.

Keep_pedalling

This is one of the most complex exemptions. So the questions I would ask before even attempting this are 1, doo they have children and assets over £1M? or no children and assets over £650k? If not then is it really worth all the bother? If they do then they should also look at other options as well as this only stops their estates growing and does not reduce the current liability. 

Doc_N

Keep_pedalling said:

This is one of the most complex exemptions. So the questions I would ask before even attempting this are 1, doo they have children and assets over £1M? or no children and assets over £650k? If not then is it really worth all the bother? If they do then they should also look at other options as well as this only stops their estates growing and does not reduce the current liability. 

Agreed - both valid points. The other options (essentially gifts) were put in place some years ago to benefit from the 7 year rule.  Now it's essentially a matter of preventing growth to keep the total (including the house) below the £1m mark. Gifts out of income do that rather nicely - subject of course to the record keeping required and observing the other requirements. There are of course other small exemptions, but there's no limit to the gifts out of income.