Charitable Donations and Gifts out of Surplus Income (IHT)

File_Explorer

Hi,

I would like to ask for an opinion on the following – how charitable donations are treated when they are given in combination with gifts from surplus income.

In the specific scenario I am asking about, the estate will be near the threshold for IHT.

Regular monthly gifts are being given to the children, well documented, regular, and out of surplus income (Pensions – expenses and gifts)

But, charitable donations are also being given every couple of months or so, which if included in the surplus income calculation, would not allow the full gifts to the children to be exempt from IHT.

My hope is that as charitable donations are exempt from IHT, they will not be used in this surplus income calculation and instead could be allocated to gifts out of capital savings, which they are in effect. The standard of living of the Estate holder is in no way detrimentally effected by any of these gifts.

Hoping for your take on it, or if anyone has had dealings with HMRC on this subject,

Many Thanks in Advance.

Keep_pedalling

Regular charitable gifts would be classed as normal expenditure so would reduce the amount available for gifts from excess income.

Savvy_Sue

https://forums.moneysavingexpert.com/discussion/comment/81873994#Comment_81873994

But how does one establish whether charitable giving is 'regular', if it's not given by SO? The OP says 'every couple of months of so', and if the amounts vary as well as the timing … Maybe it doesn't make a difference, you are very much more informed about this kind of stuff, but that question did occur to me.

File_Explorer

Thanks,

So even when the charitable gifts are exempt from IHT they are still counted in the surplus income calculation and cant be classed as 'gifts from savings' ?

Is it the regularity of the charitable gifts that brings them into the surplus income calculation? If so, could the estate holder give larger, but more random gifts to charity, not following a regular pattern?

Thanks in advance.

Keep_pedalling

https://forums.moneysavingexpert.com/discussion/comment/81874015#Comment_81874015

Good question. For simplicity I would say anything that gift aid can be claimed against has to from income.

silvercar

https://forums.moneysavingexpert.com/discussion/comment/81874049#Comment_81874049

why? You pay tax on interest above the tax free allowance, so why can’t the charity donation come from capital?

Keep_pedalling

There is nothing to prevent you from making larger gifts from capitalI but to maximise you gift for charity (and yourself if you are a higher rate tax payer) then you would use gift aid which would suggest (to me at least) that these gifts came from income.

Having said that the rules around GFEI are so vague I could be wrong and can’t find anything definitive one way or the other on line.

I am glad I have never got into this complex exemption, that I think is no longer fit for purpose, just increase the annual exemption and scrap this, it is just too messy.

File_Explorer

Thanks again,

Yes, I couldn't find anything in the guidance that really helps either. I was hoping that with gifts to charities being exempt from inheritance tax, they would just be taken out the surplus income calculation, as long as there was no decrease in standard of living, which there is not.

The charitable gifts are, in fact, coming out of savings (capital) so I would have hoped HMRC wouls accept/agree with this and not include them in the surplus income analysis.as expenses from income.

I'll keep searching for someone who has tested this theory with them, lol.

Whats the chances of presenting a case to them, and having them agree, being that the rules seem a bit unclear?

Thanks again.

poseidon1

https://forums.moneysavingexpert.com/discussion/comment/81874298#Comment_81874298

See below HMRC guidance -

https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm14255#:~:text=IHTM14000-,IHTM14255%20%2D%20Lifetime%20transfers:%20conditions%20for%20normal%20out%20of%20income%20exemption,meet%20their%20normal%20living%20expenses%2C

You will note the level of granular analysis HMRC appear to expect their inspectors to conduct when considering gifts out of surplus income exemption claims.

In your case you indicate charitable gifting effectively made from capital, but surely if gift aid is being claimed ( you don't confirm one or another) the implications of allowing charities to claim such relief is that you have paid sufficient income tax on your income you are gifting.

You would therefore be relying on HMRC not picking up on that disconnect, when considering your non charitable regular income gifts.

As Keep_pedalling points out, this particular exemption can be a difficult one to put into effect cleanly, unless there is clear and unambiguous surplus between net income available as against costs of maintaining usual standard of living.

File_Explorer

Hi,

Thanks for the reply. I see your point re gift aid, I think he will be signing off on the charities claiming this - it basically lets them receive more money.

I did read that you can give gift aid from having paid capital gains tax (which he has), not just income tax - was wondering if this would affect anything?

Thanks in advance

poseidon1

https://forums.moneysavingexpert.com/discussion/comment/81874518#Comment_81874518

The fact that there is CGT payable as well as income tax, does indeed help in taking out the charitable gifts from the income equation -

https://www.gov.uk/donating-to-charity/gift-aid#:~:text=Paying%20enough%20tax%20to%20qualify,Do%20this%20either:

However, unless the donor feels it likely they will be paying CGT each year, what about the years they don't?

It must be remembered that it is the executors who are lumbered with the task of demonstrating the income gifts to children fall within the exemption. There would therefore need to be clear ancillary annual notes from the gift donor to the executors , explaining the fact the charitable gifts are made from capital supported by CGT payments in the relevant years.

The HMRC IHT 403 exemption reporting template at page 8 does not accommodate the ability to do this, so a separate narrative explanation from the executors would be required.

Generally, whenever questions related to this particular exemption arises, the prospective gift donor should always have in mind , what have they done ( by way of record keeping) to give the executors the best chance of presenting a coherent claim.

I would say that where top level accountancy firms reccomend this exemption to clients, the firm maintains all the relevant data in house ( as part of the routine annual income tax compliance for the client), and invariably takes on the task of completing the IHT403 based on those records when the time comes.

The following tax practitioner's general guide on this exemption is therefore well worth reading by all those intent on using the exemption-

https://www.taxadvisermagazine.com/article/normal-expenditure-out-income-exemption#:~:text=individuals%20or%20trustees.-,The%20exemption,%E2%80%A6'%20%5BEmphasis%20added%5D.