Gifts from Surplus Income

loiner

I’m currently assessing my father’s surplus income in order to establish how much he can give away as gifts made from surplus income which will be exempt from inheritance tax.

I’m unsure whether the small gifts of up to £250 per individual and £3000 to a different individual should be treated as coming from his income or his capital. Can anybody confirm please?

Similarly, would birthday and Xmas gifts come from income or capital?

loiner

https://forums.moneysavingexpert.com/discussion/comment/81964047#Comment_81964047

Ummm, I'm thinking they're all from capital. Be interesting to see any other responses.

loiner

Thanks for your responses. I think I need to research this further.

My father is currently giving surplus income to his grownup children monthly and then I do a roundup of all his dividends and interest at FYE and share that between us. I have done this for the past few years and consider this to meet the requirement for payments to be on a regular basis.

greysilver

The relevant law is Inheritance Tax Act 1984, sections 19, 20 and 21 (and a few other sections for gifts on marriage, to political parties, etc)

My interpretation is that you should make a list of all gifts. Then look at the rules in each section to determine if the gift is exempt from IHT. A gift may be exempt for more than one reason, but that doesn't give the tax payer a choice on how to allocate the exemptions.

The £3000 annual exemption rule says that the first £3000 of gifts in any tax year, in calendar order, are exempt. (Says nothing about capital or income)

The gifts out of income rule says a gift is exempt if it comes out of income, is part of a pattern, and doesn't reduce the givers standard of living.

The small gifts rule says that if the sum of all gifts to one person do not exceed £250, then those gifts are exempt.

So to benefit from the legal structure, one should give £3000 from capital at the beginning of the tax year, and then small gifts and regular gifts out of income.

In practice, when filling in IHT403 schedule (Gifts and other transfers of value) to determine Inheritance tax, the instructions tell you not to report gifts that fall under the £250 limit. So it seems you get the opportunity to give £250 to multiple people, and a further £3000 to others.

(I am not a lawyer or accountant. But I have filled an IHT403 schedule as a layman)

probate_slave

I believe the key guidance here is IHTM14132 which clarifies that available income for "normal expenditure out of income" gifts is considered first before other exemptions are applied. Thus surplus income is never depleted by other gifts, it is entirely available for NEOOI gifts. Any other gifts, exempt or otherwise, are deemed to be from capital.

loiner

Thanks everyone for your replies. I think I'm pretty much on the right lines but have more reading to do from the last 2 posts. Everything is recorded on my spreadsheets with pivot tables.

Albermarle

f you want to be extra safe, it’s worth documenting this clearly each year so it’s easy to justify that the gifts were genuinely made from income and not from capital.

Especially as your Executor will have to prove to HMRC that you followed the rules very closely.

silvercar

If your income is variable, your surplus income is likely to be variable, so can your gifts out of income be different amounts in different tax years, but still established as a pattern? Or does the pattern of regular giving require that the amount be the same each year?

loiner

https://forums.moneysavingexpert.com/discussion/comment/81975580#Comment_81975580

It's all on the spreadsheet 😀

loiner

https://forums.moneysavingexpert.com/discussion/comment/81976421#Comment_81976421

I believe it's the frequency of payment (weekly, monthly, annually etc) that must be regular. As you say, income and expenditure will be variable.

silvercar

https://forums.moneysavingexpert.com/discussion/comment/81980520#Comment_81980520

That’s good to read. If the worst should happen that would be to our advantage as we helped out with a large deposit for our offspring’s house purchase in a year when my OH had a large bonus. Just need to remember to give a small gift each year, to keep up the annual gift giving.