IHT - using Normal Expenditure from Income. What is income?

sherlock228

https://forums.moneysavingexpert.com/discussion/comment/82123845#Comment_82123845

agreed. I know statistically PB has an "interest rate" but it is still gambling. I held PB from when I was a baby, they never won a single penny. So the argument to my mind is very much based on what is a "hefty balance" in PB. My £13 of PB was worth a lot of money when given to me, but when I "sold" them decades later they were worth £13. Not much of an "investment" 😂

Riedel

Dales1 & DRS1's comments are interesting. In keeping my own records, I used to include Premium Bond winnings when totalling income for the year. I reckoned, as does Dales, that it was reasonable to treat it as income - at least up to the level of the overall prize 'percentage'. But then DRS1 shows the potential weakness here. Why would, say, £2000 annual winnings all be income but £3000 not (if the latter figure exceeded the prize rate)? Surely all the winnings are income for the purposes of this relief or none of them are. And, if they are income, then it would, as DRS suggests, be possible to make regular gifts of variable amounts quantified by reference to the winnings received - even up to 100% - if they were all surplus to requirements.

HMRC don't seem to have any published view on whether Premium Bond prizes represent income for the purposes of this relief - perhaps wisely given the absence of any case law on the matter. I suppose the best advice for anyone is to ensure that their 'normal expenditure' gifts are limited to amounts which can be shown to have come from surplus funds which pass the 'income' test without fear of any challenge. The aim must be to leave your executors with as much certainty as is possible rather than with a position that is arguable and open to challenge.

Albermarle

Could be worth reading this - a well known source of info in the personal finance field.

Gifts out of surplus income - 15 points to consider

For speed here is the summary.

Pushing the boundaries of what is included in income and expenditure to arrive at a surplus will leave clients more at risk of a claim being rejected by HMRC, either fully or partially. Any part of a claim that is turned down will be treated as a failed PET and taxed accordingly. This could use up the nil rate band available to the estate and possibly the nil rate band available at the 10-year anniversaries on any subsequent trusts created.

It is explicitly set out in legislation so it is a "loophole" in the same way that getting tax relief on pension contributions, or ISAs, are "loopholes" (which they are not).

All loopholes are explicitly set out in legislation, but it is where the legislation is not used - or overused- or abused, in the way it was intended. Utilising a loophole is normally perfectly legal.

A good example is employers using salary sacrifice for pension contributions, to avoid paying some NI. Plus for some employees making pension contributions in this way so they can still claim child benefit when they are high earners. Another would be using the pension small pots rule in an artificial way by deliberately creating small pots. All legal but not what was intended when the legislation was enacted.

The Gifts from income to reduce IHT bills is probably more of an edge case, but the word 'loophole' crops up when it is being discussed in the personal finance sections of publications like the Daily Mail for example. A Treasury looking for funds,' from those with the broadest shoulders' could easily label it as a loophole, and ask HMRC to look into blocking it.

Dead_keen

Why would, say, £2000 annual winnings all be income but £3000 not (if the latter figure exceeded the prize rate)? Surely all the winnings are income for the purposes of this relief or none of them are. Tax is unfortunately very subjective at times.

If I bought a car:

• pre-covid and sold it for a profit after, that profit is not income
• from the estate of a neighbour who had died during covid and sold it a month later for a profit (and make a habit of buying and selling cars to make a profit), that profit is income
• as above but it was a one-off, that profit is probably not income

I'd argue that premium bond prizes are similar. At one level typical prizes where the investment in premium bonds is part and parcel of a normal investment strategy, they are income. You got £10 in 1966 because your grandad had made a bet on the footy and you never thought about them, the £1m you win today is not income. In between, someone has to take a view, someone else has to decide what they think and if they disagree it is up to a judge.

Also, there is nothing to be lost by including (as Income on IHT403) these reinvested dividends and PB prizes (if you are among those who believe they ought to qualify). All that HMRC can do is to deny the claim. And the IHT403 form itself does not draw out the presence of such items, as these amounts will be subsumed in the row headings which are specified on the form

I agree with a couple of buts here. I agree that if it turns out that the exemption did not apply there is no more IHT due than if you had not made the gift. But I disagree with the comment about the form in that it can be helpful or important to include more detail (e.g. Since Christmas 2021 the deceased had a policy of paying regular gifts out of his surplus income within 12 months of the end of the tax year. He has applied that every year since. His income includes his pensions, interest, dividends, premium bond prizes and rental profit, this included the approximately £1,500 of prizes each year as well as the £1m prize he received in September 2026).

My second but is that if HMRC do deny a claim, there would be interest on late tax, penalties (unless adequate disclosure) and all the fun of trying to get the cash from the beneficiaries who have already received it.

silvercar

My second but is that if HMRC do deny a claim, there would be interest on late tax, penalties (unless adequate disclosure) and all the fun of trying to get the cash from the beneficiaries who have already received it.

The beneficiaries may well be willing to take that risk if it saves them a shedload of tax.

Aren't big PB wins in the same category as employee bonuses? Accepting that we are fairly niche, we have been able to give house deposit gifts to our offspring coinciding with when OH has received big bonuses from work. By giving smaller amounts in every other year, it is clear (and documented) that the size of the gifts are linked to his income.

poseidon1

https://forums.moneysavingexpert.com/discussion/comment/82124287#Comment_82124287

Publications like the Daily Mash and its ilk can be safely ignored in characterising the gifts of surplus income as a 'loophole'.

As I pointed out in another thread, the exemption has exsisted as a valid estate duty mitigation strategy for the well heeled upper middle classes, as far back as the Edwardian era via section 59(2) Finance Act 1910 . This was later repealed and revised by later statutes culminating in what is now section 21 IHTA 1984 below -

https://www.legislation.gov.uk/ukpga/1984/51/section/21

Generally, all that is happening now is the new mass affluent class emerging from the boomer generation, are attempting to navigate for themselves (as evident in this thread) the intricacies of the different forms of IHT mitigation/avoidance but largely without the direct benefit of the knowledge and actual experience of the upper tier of solicitors and tax accountants , which the upper middle classes historically have on tap.

Dead_keen

the word 'loophole' crops up when it is being discussed in the personal finance sections of publications like the Daily Mail for example

Using the Daily Mail's definition of a loophole, you are absolutely right.

A Treasury looking for funds,' from those with the broadest shoulders' could easily label it as a loophole, and ask HMRC to look into blocking it.

Changing legislation is for Parliament, not HMRC.

silvercar

https://forums.moneysavingexpert.com/discussion/comment/82124424#Comment_82124424

That's a result of fiscal drag combined with house price inflation. Without either the boomer generation wouldn't run the risk of IHT.

poseidon1

https://forums.moneysavingexpert.com/discussion/comment/82124450#Comment_82124450

Granted.

That's the primary problem with the current IHT regime.

Not in any way designed with this 'new' cohort of unadvised ordinary members of public in mind, and apparently no parliamentary appetite to simplify or streamline the regime for these growing ranks of reluctant tax payers.

Albermarle

https://forums.moneysavingexpert.com/discussion/comment/82124424#Comment_82124424

I would not normally quote the Daily Mail in any discussion, but just trying to make the point that if politicians want to block this route of reducing IHT liability, then they will no doubt refer to it as a loophole in the way the Daily Mail does, and other media outlets will also pick up on the label. Of course the large majority of the public will not understand the detail, and just see it as another way of the well off avoiding tax. So probably an easy target.