Gifts from income or capital

danco

I'm old enough now to be concerned about making things easy for my executors when I die.

I know that I can make regular gifts out of surplus income that will not involve IHT but that these gifts must not erode my capital.

What happens if my total expenditure over the year reduces my capital but some of my expenses are unusual. I would want to consider these unusual expenses as being the reason for erosion of capital, with the regular payments having nothing to do with that.

A couple of specific cases. I take frequent weekend holidays, and of course these are part of my normal expenses out of income. But this year I took a cruise costing several thousand pounds. I would consider this exceptional expense for which it is justifiable to cash in some capital, but how does HMRS regard it.

And normal furniture repair and replacements obviously come out of income, but I also bought an adjustable chair, which is expensive. Again I regard this as a good reason to spend capital.

The final item I can think of is that I bought a water softener and water purifier. They aren't replacements of standard household items, so I withdrew funds to pay for them.

A new computer and phone, on the other hand, obviously have to be considered as being paid for out of income, since they are simply replacements for existing items.

Keep_pedalling

These are all a bit of a grey area. Is your estate actually in IHT territory? I would not bother with adding this complication if it is not. 

tacpot12

I'd agree it is a grey area, and there is not much advice available about this. I expect more will come out as more people as these sorts of questions. 

Keep_pedalling

I think this is an exemption that really needs to be got rid of in return for an increase in the much simpler annual exemption. Apart from the difficulty in allocating spend to income and capital, income is no longer that straight forward with modern pension arrangements. 

danco

Thanks. Yes, definitely IHT will be due. Probably I just have to leave things as they are. I have put a note with my will that I regard these regular payments as being out of income. HMRC may well refuse to accept this but if they do not give guidelines there's not much else I can do.

Keep_pedalling

danco said:

Thanks. Yes, definitely IHT will be due. Probably I just have to leave things as they are. I have put a note with my will that I regard these regular payments as being out of income. HMRC may well refuse to accept this but if they do not give guidelines there's not much else I can do.

If your executor is to claim this exemption you really need to provide details of both income and expenditure. Have a look at page 8 on IHT403 to see what is needed.

https://assets.publishing.service.gov.uk/media/5f60b44cd3bf7f7234487bf0/IHT403-05-20.pdf

phlebas192

Income & expenditure are considered "taking one year with the next", ie income & expenditure should be considered over more than a single year when determining if you have surplus income. So if a large purchase means you don't have surplus income in one year, it doesn't necessarily mean that you don't have surplus income for gifting purposes.

Personally, I would be rather wary about trying to argue that items of furniture or household appliances are exceptional expenditure, however expensive they are. OTOH, a once in a lifetime holiday probably is exceptional.

Ultimately, it doesn't actually matter what you (or I) think, it's what your executor(s) are going to be happy arguing.if HMRC query it. 

Smudgeismydog

Not sure I understand your query.
Any money you spend on things for yourself, e.g. furniture replacement and expensive holidays are not ‘gifts’.

poseidon1

Keep_pedalling said:

I think this is an exemption that really needs to be got rid of in return for an increase in the much simpler annual exemption. Apart from the difficulty in allocating spend to income and capital, income is no longer that straight forward with modern pension arrangements. 

My sentiments exactly.

As I mentioned in another thread I would also get rid of all the other gift exemptions (except PETs) and in their place a standard £15k to £20k annual exemption per person to use however they wish. 

A larger annual exemption together with PETs would suit the vast majority of the population.