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?

fuzzzzy

Not an expert but I have always assumed the small £250 gifts per individual and the £3000 to a different individual are made from capital, and any additional birthday/Xmas gifts (to the same individuals) come from income.

Edit: Actually thinking about it a bit more I don't think you could make any additional gift to an individual you had already used the £250 individual gift allowance on without invalidating the £250 individual gift allowance. The small gifts allowance of £250 from capital would have to cover their birthday/ Xmas gifts and not be additional to it.

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.

fuzzzzy

Yeah it has confused me a bit. I have only really been giving more substantial gifts for the last couple of years, to my adult child and £250 a year to grandkids. I give a gift of surplus income to my adult child every year at the end of March. In addition to that I also give them a gift from capital of £3000. The first year I did it I did not give them the full £3000 as I subtracted monetary gifts I had already given them for Xmas and birthday from the £3000. The last time I made the gifts though I decided I should just count their birthday and Xmas gifts as from surplus income and give them a full £3000 gift from capital in March, and then a further gift from surplus income.

I must admit I do find it all a pain in the butt to think about. I am not that old yet and hoping to live a lot more years so that all this gifting will just drop out of the picture in time anyway and not be relevant when I die. I do intend to make some larger gifts from capital at some point with the intention of living another 7 years after them, but just not quite ready to make them yet.

Edit: Thinking about it a bit more I think if you utilise the £250 individual gift allowance for a particular individual then you would not be able to gift them any more that year without invalidating that allowance.

I suppose birthday/Xmas gifts can count as either gifts from income or gifts from capital depending on how you structure your gift giving.

You could give certain individuals gifts for birthday and Xmas which combined for each individual did not total more than £250 and these would count as gifts from capital. You could also give gifts from income for birthdays/Xmas to other individuals of larger amounts if you had sufficient income, as long as it was a regular gifting pattern.

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.

fuzzzzy

That sounds like a good approach and I think it would be acceptable for gifts from surplus income, as long as the total gift amount is covered by all his income and leaves enough to cover all his normal expenditure.

You then have £3000 of capital you could also use divided up for birthday/Xmas gifts to the grown-up children every year and £250 each to gift any other individuals from capital every year.

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.