Another Gifting from Income question

Sreev

Good evening everyone. We are already gifting regularly from income and understand the records to be kept. I have a specific question.
We do have significant cash savings which we use to pay for our extravagant luxury holidays. To put that in perspective think equivalent to 2 months income. Do we have to enter this expense in the holiday column or can we justifiably call it a capital expense. Weekends away etc are financed from our monthly income. I understand that if we were to transfer a regular amount from our savings capital each month, equivalent to our holiday expenditure, that still wouldn’t be classified as income, so that wouldn’t help. Is that correct?

Keep_pedalling

If you are doing it on a regular basis then that is part of your expendature to maintain your current lifestyle. If you can’t take these holidays without dipping into your savings then you don’t have any excess income.

JellyBeanie

Using capital to meet an expense does not mean the expense is capital in nature.

The sufficient income criteria doesn't make any distinction between revenue and capital expenses. It looks at whether you have sufficient income after making all your gifts, to maintain your usual standard of living.

That is to say, it looks at whether the funds used to pay the expenses are capital or income as opposed to looking at whether the expenses are capital or revenue in nature.

Doesn't matter if you fund the standard of living from capital , just that you have sufficient income to do so.

Dead_keen

Using capital to meet an expense does not mean the expense is capital in nature.

This implies that there is an "expense is capital in nature" test. There is not. The legislation uses "normal expenditure of the transferor".

To me this suggests:

1. There are payments of money that are "expenditure" and payments that are not.
2. Some expenditure is "normal" and other expenditure is not.
3. You need to look at the personal characteristics of the individual concerned to see what is "normal".
4. These terms are not defined further and so you need to look at what those words, like "normal" normally mean, with a bit of common sense about it.

So I go on holiday regularly. I might go for a day trip to look at something. I might go to a little place in Cornwall for a few days, I might go on a special posh-class cruise for a month. What I do for my holidays changes depending on what I fancy and what deals are going cheap. For me, all of this is normal expenditure.

Someone else might love going camping once every couple of years in the south of France. But they have had a life long hankering to do a world cruise when the retire. They have saved up for it over lots and lots of years and, on retirement, they book a 121-day around the world cruise that costs a medium-sized forture. This is clearly expenditure. But I'd be quite happy to say that for this person, this is not "normal" expenditure.

Same with cars. Someone might buy a brand new car every couple of years. That's normal expenditure. Someone else buys a car every ten years. Is that "normal" expenditure? No idea. It will depends on the facts of that individual. I can easily see why it is normal expenditure because it is all part of their "travel" expenditure. But I can also make up facts to say it is not.

JellyBeanie

https://forums.moneysavingexpert.com/discussion/comment/82051699#Comment_82051699

I wouldn't say it implies that. Especially because in the first sentence of the following paragraph I said it doesn't make any distinction between revenue and capital expenditure. Sounds like you may have only read the first sentence.

Furthermore, the normal expenditure wording you refer to is a requirement on the gifts being made. That the gifts must form part of their normal expenditure. This is why the gifts must be regular, so they qualify as normal expenditure.

https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm14241

That does not apply to the usual standard of living though. Only to the gifts being made.

(c)that, after allowing for all transfers of value forming part of his normal expenditure, the transferor was left with sufficient income to maintain his usual standard of living.

That conditon means that after allowing for gifts which meet condition (a), they must have sufficient income to maintain their usual standard of living. It doesn't mean the usual standard of living only includes normal expenditure.

phlebas192

My own view is that if capital is realised to purchase anything that is depreciating in nature then you cannot possibly have surplus income. Doesn't matter whether it is a cruise, car or kitchen. They are all depreciating assets. Counter examples would be purchasing art works, classic cars or building an extension to your house where in each case the intention is to swap one asset (cash) for another that permanently adds to your assets. Or, more prosaically, simply buying shares.

The grey area is really in the concept that income converts to capital over time. Saving over many years to fund a large purchase should mean that the income retains its status until spent. So if you buy a new car every 5 or so years or replace a kitchen every 20ish then the income accumulated for those purposes should not be considered to be capital for at least 5 or 20 years respectively.

Practically speaking, that probably requires saving a set amount into a "new car" / "new kitchen" / "cruise around the world" fund each month / year. That gives your executors a clear argument that the income was being accumulated with the intention of using it to support your normal expenditure.

I'm not aware of any case law on this issue so it remains a grey area.

Sreev

Thank you for all your considered replies. I now need to reflect on my personal circumstances. It seems that I have to find a way to convert my not insignificant cash reserves to generate a monthly income. I should probably also consider a higher rate of drawdown on pension funds. Those funds were originally to be left untouched but maybe I need to take the 40% tax hit and realise a higher monthly income. A lot to think about, thank you.

silvercar

Rather than start a new thread:

Assume that you haven’t yet retired and your income can be shown to be in excess of your expenditure. If you maintain regular gifting, by means of an annual gift to your offspring and decide to vary that amount one year (eg for a house deposit) due to receiving a bonus from work, but otherwise continue with regular annual gifting. Given that you’ve established a pattern of regular giving, and can show that all gifting is from income, can the whole amount of the deposit fall under the gifting from income rule?

phlebas192

https://forums.moneysavingexpert.com/discussion/comment/82052397#Comment_82052397

The size / nature of the gift needs to form part of a regular pattern. So a modest amount for several years followed by a much larger one in a single year isn't likely to pass that test. That said, if you had been gifting a percentage of your bonus every year and one year that bonus was much larger so the gift was correspondingly larger then that would be part of a regular pattern.

silvercar

https://forums.moneysavingexpert.com/discussion/comment/82052858#Comment_82052858

IHT403 doesn't require you to separately identify the bonus element of the salary, so it only looks like a salary increase matched by a gifting increase.

Sreev

https://forums.moneysavingexpert.com/discussion/comment/82052397#Comment_82052397

For context, we are both retired, late 60's. We presently gift a total of £2750 per month between us. Our gross income is £100000k per year split equally, a combination of private and state pensions, rental income and some drawdown. We have £400000k in cash, spilt 50/50 in Isas and savings. We also have a pension pot in drawdown, roughly £350000 each. Our estate is not eligible for IHT relief.