Inheritance Tax

DT2001

https://forums.moneysavingexpert.com/discussion/comment/82047006#Comment_82047006

About 10 years ago I had the task of constructing an income and expenditure worksheet from cheque stubs! As these included cheques cashed for shopping/meals etc I had to guesstimate allocation between different categories. HMRC didn’t raise any queries I think because it showed savings increasing at the same time so the surplus wasn’t being fully gifted. In addition I am sure it will make a difference if you can show you have made a good ‘stab’ at the calculation and is it worth them challenging say £5/10k gifts per year which might be only partially incorrect.

My MIL gets the natural income from her S&S and cash ISAs paid monthly into a separate account from which she pays monthly gifts. Her other income all goes into one bank account from which she pays her regular bills and a payment to another account for everything else. She mostly uses a card. She is building up her cash ISA very slowly as well so I think proving that she is not paying out every spare penny. I will construct a worksheet if necessary but the number of entries as MIL gets older has reduced. The reason she has kept control of the capital is to provide for care if needed and we will redirect the income at that time. Her total estate will be close to the £1m if property prices increase and she doesn’t need care so I have not suggested a detailed breakdown.

poseidon1

See below a contemporary tax case restating certain principles underlying the gifts out of surplus income exemption - in this case the question of what constitutes 'normal expenditure' and whether there is a settled pattern of gifting -

https://share.google/ISe6aHLpnmR9ES8Sl

Unusually the case was bought by a living person rather than executors, since the tax payer was trying to use the exemption to avoid the 20% IHT charge on chargeable lifetime transfers. I imagine very few people realise there are number of situations where IHT can in fact be levied on lifetime gifts.

Bostonerimus1

https://forums.moneysavingexpert.com/discussion/comment/82047989#Comment_82047989

So it would be prudent to make a written commitment to make the gifts from excess income and get that witnessed and dated. Then keep an annual budget with the gifts and their source as a line item, maybe make the payments from a dedicated bank account.

Dead_keen

So it would be prudent to make a written commitment to make the gifts from excess income and get that witnessed and dated. Then keep an annual budget with the gifts and their source as a line item, maybe make the payments from a dedicated bank account.

No, that goes too far. Nothing needs to be witnessed, there does not need to be an annual budget, the source does not matter, and there is no need for a dedicated bank account.

You could just write an email saying:

Hey Jack, I've set up the standing order for £100 per month that I mentioned. Can you let me know you that you got the first payment. Love mum and dad.

Now that works well if you are doing regular gifts to the same person. Obviously, if you were giving money to a grandkid they wouldn't know what email was, so you'd probably use some sort of interpretive dance on TikTok to ABBA’s “Money, Money, Money”.

If your intention was to give away varying amount of money, you might just do an email to your executors saying that you plan to give away between £50,000 and £100,000 per year to grandkids until you are down to your last million, with a focus on those with cash needs first (e.g. going to uni, getting married, buying a house, driving lessons, new car and so on) and secondly, to give them some cash for fun (new gaming monitor, holidays, or whatever) but ultimately you plan to be roughly fair to each over time. That establishes the normal expenditure bit (and you can then get a spreadsheet together to see what your income and other expenditure was on a year-by-year basis going forward to work out what part of the gifts are covered by the exemption).

Bostonerimus1

https://forums.moneysavingexpert.com/discussion/comment/82048051#Comment_82048051

IMO, better safe than sorry. The source is obviously vital as it must be from income and documenting your other spending is important to show that you are not using capital to live off. So if you are lucky enough to have a large DC pension you might have your SP paid into a dedicated bank account and just gift that once or twice a year. This would produce a simple record of the gifts for executors to reference. Informing your executors of the gifts is also prudent and that might be via an email or by setting up a plan and having them witness it. People might want to do less and might be ok as far as HMRC, but I like to make my executors job as easy as possible.

QrizB

Obviously, if you were giving money to a grandkid they wouldn't know what email was, so you'd probably use some sort of interpretive dance on TikTok to ABBA’s “Money, Money, Money”.

I look forward to this featuring in a tax law case sometime next decade 😄

LHW99

The source is obviously vital as it must be from income and documenting
your other spending is important to show that you are not using capital
to live off.

This is where, to me, it gets (or has the potential to get) a bit murky.

Some things eg new car, new kitchen are presumably OK ascribed to capital, if you buy them outright. But what about cars on credit, tooth implants etc where you will be paying regular installments. Some may allow interest free loans, and therefore chosen as more MSE than paying up front from capital. Presumably that has to count as reducing your income, even if you have the capital put aside to cover the monthly payments?

And if you use capital for buying a car outright, and hence your wealth decreases, are you expected to use your income to top it up again, before you can go on with regular gifting?

NormalNorman

https://forums.moneysavingexpert.com/discussion/comment/82048397#Comment_82048397

https://meaningfulmoney.tv/2026/06/24/listener-questions-episode-53/

Bostonerimus1

https://forums.moneysavingexpert.com/discussion/comment/82048397#Comment_82048397

Some basic documentation to show the frequency and size of spending will help executors greatly. I'd probably follow general accounting rules to distinguish between capital expenditures and regular living expenditures; so buying a car with cash is capital expenditure, but leasing a car and buying petrol would be living expenses to be paid from income.

cfw1994

https://forums.moneysavingexpert.com/discussion/comment/82047901#Comment_82047901

Are you suggesting that the gifts from excess income CAN include regular ISA withdrawals?

I thought that was not allowed, & that it had to be regular pension/annuity income.
AI confuses me by suggesting it is okay if it is dividend or interest: "Qualifying Income: Only the natural yield, such as dividends or interest, paid out from the ISA counts as income."

I just draw an amount pcm from mine….it has continued to grow to date, but is still invested, so the regular income is not 'just' dividend or interest.