Gifts from Income

rayker89

Hi

My mum passed away recently and as executor I'm completing the IHT400 form in order to claim her RNRB, her NRB and the transferable NRB and the RNRB from my Dad who predeceased her. Total estate value can therefore be £1 million before we owe IHT. 

I'm stuck on the gifts from income bit - IHT403 - my Mum gave my sibling and I gifts totaling £44,000 in 2023-24 as a lump sum (£22k each) and then more regular gifts during 2024-25 which totaled about 10,000 each and had started making regular gifts for 2025-26 of about the same £10,000 each per year before she passed away at the end of July. (All of this is surplus to her £3000 a year allowable gifts) 

Currently the value of the estate is hovering at about £944k although this may go up with the sale of her house. If I include the lump sum of £44k gifts then the estate goes up to £988k

She had oodles of spare money but always struggled with spending it - my father was in a care home and although she had separated their money out she was always worried that his money would run out and she would have to use hers to pay - not wanting him to be moved to Council approved home if his money ran out. 

In 2022  3 things happened all at the same time:

My father got continuing healthcare allowance - paying for his care so she didn't have to worry about it
My mum got diagnosed with a very aggressive cancer and told she only had a few years to live

Her financial advisor told her she was never going to spend all her money and to get spending it!

She therefore made the decision to gift more money to myself and siblings. This commenced with the one off payment to us in one month of 23-24 and was the followed by smaller weekly and monthly payments throughout 24-25 and 25-26 (until she passed away). 

My questions are:

1. This money she gave us came from her stocks and shares ISA which is an investment ISA so that counts as "investment income" and not money from Capital? Is this correct? This means it then counts as surplus income. After her diagnosis she regularly accessed lump sums of her investment ISA as and when she needed it. 

2. For it to be counted as regular gifts from surplus income can it be a lump sum in one year followed by more regular amounts in the next couple of years - surely your "surplus income" depends on what you are able to spend. When she was first diagnosed she had a major operation and was therefore in recovery for six months - unable to go on expensive holidays or out very much. Her surplus income was therefore much more in 23-24 and she gave us a larger lump sum. By 24-25 she was feeling better, allowing her to start doing things again - more money spent on holidays and entertainment and therefore a bit less "surplus" passed on to us. In reality this is all just to do with what she had in her current account - she had absolutely loads still available in her investments anyway......

3. We don't currently owe any IHT and I'm only filling in the IHT form to claim the NRB and RNRBs for both parents. We will only owe IHT if her house sells for about £30-40k more than it's been valued at which obviously I can't predict now. Can I just leave the whole gifting section aside and only return to address it if and when we sell the house for more and are actually liable for IHT. Or would that be deemed unwise?

I'm not trying to fiddle anything here - she genuinely had lots of excess surplus income that she was spending at the end - it's just a question of whether I need to go back through all her bank accounts at this stage if it's not going to impact on the IHT anyway. 

I'd welcome your thoughts. Many thanks 

nakie999

I went through IHT403 last year for my mum and it was similar. HMRC accepted gifts from investment income as surplus income because it was regular and didn’t reduce her standard of living. The paperwork was the painful bit, not the outcome.

Keep_pedalling

To be able to claim gifts from excess income you need to be able to show a patten of regular gifting and show that the income exceeded expenditure (see form IHT 403 for the level of detail that is required). 

The lump sums are certainly not gifts from excess income although if she had £20k excess income in the final 2 years of her life you should be able to claim those, but because the estate is so close to IHT territory HMRC may pay particular interest in your numbers so you need to be accurate with your calculations.

NorthYorkie

My views on your questions are;

1. I would suggest that the amounts withdrawn from the ISA are not necessarily income; my reaction would be to regards them as capital. BUT you do not need to identify gifts with specific sources of income (see IHTM14250 - Lifetime transfers: conditions for normal out of income exemption: out of income - HMRC internal manual - GOV.UK and, in particular, where it says 

"If a gift is made out of a current account you only need to check that the gift could have been made out of income. You do not need to match the gift to specific money in the account."

i.e. if amounts have been withdrawn from an ISA and have gone into a current account - as is likely - and gifts have been made out of that account, either before or after that withdrawal, all you need to do is to calculate her total income for that tax year (remembering that this is not just taxable income), knock off her normal expenditure for that year and compare that net income with the gifts made in that year. Remember also that you can 'take one year with another', i.e. combine two or three years together if necessary.

2. I don't think that a lump sum at the beginning would be regarded as regular, habitual or the first in a pattern of giving (see IHTM14242 - Lifetime transfers: conditions for normal out of income exemption: pattern of gifts - HMRC internal manual - GOV.UK )

3. Having said all that, I personally would not put the effort into crunching the numbers in order to complete IHT403 until I knew it was going to be necessary. See how the sale progresses, my guess is that most buyers will try and beat you down on the advertised price!

NorthYorkie

P.S. Remember to knock off the annual exemption for the year the £44K was gifted (and perhaps for the previous year as well?)

Keep_pedalling

NorthYorkie said:

My views on your questions are;


3. Having said all that, I personally would not put the effort into crunching the numbers in order to complete IHT403 until I knew it was going to be necessary. See how the sale progresses, my guess is that most buyers will try and beat you down on the advertised price!

Can’t make the sale until the IHT return had been submitted, so the numbers need to be crunched before the house sale. 

SVaz

Surely 50% of the gifts came from your Father as well?  

Keep_pedalling

SVaz said:

Surely 50% of the gifts came from your Father as well?  

I read the opening post as the gifts from the OP’s mother were made after their father’s death. 

phlebas192

rayker89 said:

1. This money she gave us came from her stocks and shares ISA which is an investment ISA so that counts as "investment income" and not money from Capital? Is this correct? This means it then counts as surplus income. After her diagnosis she regularly accessed lump sums of her investment ISA as and when she needed it. 

Dividends & interest received in the ISA are income whether the amounts are actually withdrawn or not. Cash that comes from sales of funds & shares is going to be capital, not income.

poseidon1

phlebas192 said:

rayker89 said:

1. This money she gave us came from her stocks and shares ISA which is an investment ISA so that counts as "investment income" and not money from Capital? Is this correct? This means it then counts as surplus income. After her diagnosis she regularly accessed lump sums of her investment ISA as and when she needed it. 

Dividends & interest received in the ISA are income whether the amounts are actually withdrawn or not. Cash that comes from sales of funds & shares is going to be capital, not income.

Worth bearing in mind HMRC's contention that accumulated income is capitalised after 2 years for the purposes of the gifts out of income exemption.

 So even in this regard it is not entirely clear cut what constitutes surplus 'income' if ISA dividends and interest are allowed to routinely roll up rather than regularly distributed.

rayker89

Hi just an update for you all - I crunched all the numbers for the IHT403 and spoke to HMRC a couple of times and was able to demonstrate her gifts were relatively regular and varied due to her varying health (sometimes having chemo sometimes not - also some time recovering from an operation) and did not impact on her lifestyle and were therefore from surplus income. There was a big spreadsheet but ultimately it wasn't difficult just painful to gather all the info. HMRC accepted all the figures and we did not therefore owe any inheritance tax. I'd particularly like to thank NorthYorkie for explaining it clearly and nakie999 as I when I was getting fed up I kept coming back to your comment that it was "the paperwork that was painful not the outcome" which proved to be the case. Thanks all