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IHT - gifts from income

including wills and probate
funduffer
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IHT - gifts from income

#17275

Postby funduffer » December 21st, 2016, 4:53 pm

My Mum is 88 and has recently inherited a 6 figure sum from my Dad, who died earlier this year.

She wants to give money to her 7 grandchildren, wIthout incurring a large IHT bill after death.

Her idea is to invest the capital, take the dividends/interest and distribute the income on a monthly basis, via direct debit, to each grandchild. In total, together with gifts to her children, this will exceed the normal gift IHT exemption limit of £3000pa.

HMRC says the following on gift exemptions from income:

https://www.gov.uk/inheritance-tax/gifts

- normal gifts out of your income, for example Christmas or birthday presents - you must still be able to maintain your standard of living after making the gift.

As far as I can see, her idea is valid, but maybe we should write to HMRC and tell them what she is doing and confirm that these gifts are from regular income and do not affect her standard of living. (They don't as she doesn't have this income currently!)

Has anyone else experience of this method of gifting wrt IHT?

FD

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Re: IHT - gifts from income

#17282

Postby Tempi » December 21st, 2016, 5:16 pm

I don't believe there is any need to notify HMRC - if there was a requirement to do so, the Capital Taxes Office would be the place, and they tend to only deal with chargeable events during lifetime or on death. This is an exemption (gifts out of surplus income), which you/her executors would claim for on death for any payments made within 7 years.

it would be good practice, however, for your mother to write a letter to her grandchildren explaining the gifts, to store a copy with her will or with her accountant to basically set out the facts of her inheritance, her revision of her financial affairs now she has the extra funds, the intention to invest it and the fact the income is surplus to her needs (her current income needs being £xx......). As a consequence, she has surplus income, and she wishes to gift it as follows, and that her intention is to continue to do this until she decides otherwise or her needs change.

It would be normal to have to show a pattern of such giving for a period of a few years, if the executors were to successfully claim this exemption on death. But in writing such a letter, your mother is setting out her intention as to this (continued) behaviour and should there be less years of gifts than one would hope for and she passes away before a regular habit is actually established, then this letter could be used by the executors to give credence to this claim.

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Re: IHT - gifts from income

#17300

Postby PinkDalek » December 21st, 2016, 6:20 pm

funduffer wrote: Has anyone else experience of this method of gifting wrt IHT? FD


Have a look at the information HMRC may require when the IHT Return is submitted post decease at Gifts and other transfers of value Schedule IHT403 https://www.gov.uk/government/uploads/s ... IHT403.pdf and, in particular, the table entitled Gifts made as part of normal expenditure out of income.

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Re: IHT - gifts from income

#17309

Postby PinkDalek » December 21st, 2016, 6:48 pm

funduffer wrote:HMRC says the following on gift exemptions from income:


See also https://www.gov.uk/hmrc-internal-manual ... /ihtm14231 onwards for the HMRC IHT Manual on the subject of Lifetime transfers: normal expenditure out of income which provides more in depth comment than the overview you saw.

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Re: IHT - gifts from income

#17317

Postby Clitheroekid » December 21st, 2016, 7:25 pm

In view of her advanced age it might be worth considering investing some or even all of the money in AIM stocks. Although this may sound like insanity, once the shares have been owned for two years they qualify for business relief, and so escape IHT entirely. So you may take the view that accepting a degree of risk is better than that of losing 40%.

It's not for amateurs, as not all AIM stocks qualify, and you would need specialist advice. There are some firms set up specifically to deal with this, Octopus being one of the main providers - https://octopusinvestments.com/investor ... ax-service. Not cheap, but again their charges have to be viewed in the context of losing 40% to HMRC.

I should add that this is in no way an endorsement of Octopus, who may be good, bad or indifferent - I have no personal experience of them one way or the other.

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Re: IHT - gifts from income

#17329

Postby Lootman » December 21st, 2016, 8:47 pm

Clitheroekid wrote:In view of her advanced age it might be worth considering investing some or even all of the money in AIM stocks. Although this may sound like insanity, once the shares have been owned for two years they qualify for business relief, and so escape IHT entirely. So you may take the view that accepting a degree of risk is better than that of losing 40%.

Such a strategy could in fact be combined with gifting. If a portfolio of qualifying AIM shares has been held for 2 years, then they can be gifted to one's beneficiaries. Since the assets are already exempt from IHT at that point, then the gift can be effectively made without regard to the usual seven year rule.

The problem of which AIM shares qualify isn't usually too difficult to determine. Generally AIM-listed companies that produce "real" products and services will qualify. Those that are really vehicles for property or financial investment will not. The bigger problem, apart from their tendency to double or halve in price in short periods of time, or just plain go bankrupt under mysterious circumstances, is that they can be de-listed, taken over or lose qualifying status at the most inconvenient time.

As an example, two of my AIM IHT holdings, GW Pharma and Ensor Holdings, have both decided to de-list in recent weeks. Another, AP Dynamics, did a rights issue which complicated the determination of the holding period.

I can't comment on Octupus, but I really think there is a market opportunity for an AIM-listed investment trust that is set up specifically to invest only in qualifying AIM shares, making adjustments as necessary. But would such an IT be "qualifying" given that it is a financial vehicle?

Don't know.

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Re: IHT - gifts from income

#17392

Postby Tempi » December 22nd, 2016, 10:05 am

It may also be wise to look at general IHT planning in any event.

- use of nil rate band(s) hers, and her husbands if not used on his death, ie 2 x £325,000
- use of main residence relief, if that's an asset to be taken into account
- use of gifts over the nil rate band, where taper relief would apply.

The AIM shares/2 year holding (with the caveat from Lootman as to the risk de-listing/other activity on the shares) is still a valid way of getting 100% BPR, but HMRC is currently looking hard at the extent of the reliefs for Business and Agricultural Property...

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Re: IHT - gifts from income

#17396

Postby funduffer » December 22nd, 2016, 10:15 am

Thanks for all the points made.

I think the gifting from income will work, and the advice on writing letters and how to fill in the HMRC form is great. With a bit of help from myself, we can probably keep track of all the gifts, and her usual living costs.

Not sure how Mum would react to AIM, but she is not afraid of shares- she has quite a decent portfolio! I will find an opportunity to float!

As to IHT planning, assuming she lives a few more years, this will reduce as the home value gets phased into the IHT allowance over the next year or so, starting in April 2017, I believe. However, I think the estate, with the house, is >1m so it will be difficult to avoid completely, I suspect.

FD

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Re: IHT - gifts from income

#17432

Postby Gengulphus » December 22nd, 2016, 12:33 pm

Lootman wrote:
Clitheroekid wrote:In view of her advanced age it might be worth considering investing some or even all of the money in AIM stocks. Although this may sound like insanity, once the shares have been owned for two years they qualify for business relief, and so escape IHT entirely. So you may take the view that accepting a degree of risk is better than that of losing 40%.

Such a strategy could in fact be combined with gifting. If a portfolio of qualifying AIM shares has been held for 2 years, then they can be gifted to one's beneficiaries. Since the assets are already exempt from IHT at that point, then the gift can be effectively made without regard to the usual seven year rule.

Careful! There are additional conditions that must be satisfied for that to escape IHT: the beneficiary must continue to hold the qualifying AIM shares for the period between the time of the gift and the time of death, and they must still qualify for business relief at the time of death. Those conditions are mitigated by the fact that the beneficiary can use the same 'replacement' rules to deal with events like takeovers in that period as you could yourself.

I.e. in practical terms, you basically need to suggest to the beneficiary that they continue to run the portfolio until your death in the way that you would have done to maintain the IHT exemption. And the beneficiary has to decide to follow that suggestion - if the donor is still in reasonably good health and could live for many years yet, the temptation to enjoy the 'inheritance' now could be fairly high even if it costs IHT. If the donor wants to ensure the IHT is saved, that's not necessarily the best route...

Source: https://www.gov.uk/hmrc-internal-manual ... /ihtm25363 - and anyone who wants to do this and actually know what they're doing would do well to make a wider study of the rules in the relevant section of the IHT manual: https://www.gov.uk/hmrc-internal-manual ... /ihtm25000

Gengulphus

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Re: IHT - gifts from income

#17456

Postby Tempi » December 22nd, 2016, 1:51 pm

Gengulphus wrote:.....I.e. in practical terms, you basically need to suggest to the beneficiary that they continue to run the portfolio until your death in the way that you would have done to maintain the IHT exemption.
Gengulphus


Or until at least 7 years has passed from the date of the original gift, I assume....

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Re: IHT - gifts from income

#17463

Postby Lootman » December 22nd, 2016, 2:10 pm

Tempi wrote:
Gengulphus wrote:.....I.e. in practical terms, you basically need to suggest to the beneficiary that they continue to run the portfolio until your death in the way that you would have done to maintain the IHT exemption.
Gengulphus


Or until at least 7 years has passed from the date of the original gift, I assume....

Of course, because gifts that are more than seven years old do not have to be declared at all.

What the AIM route does is reduce the waiting period from seven years to two years if (and only if) the rules are followed. Taking care, as noted, to roll over those AIM holdings that de-list, cease to be qualifying or are sold.

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Re: IHT - gifts from income

#17601

Postby Gengulphus » December 23rd, 2016, 5:42 am

Lootman wrote:... Taking care, as noted, to roll over those AIM holdings that de-list, cease to be qualifying or are sold.

Not actually necessary in the case of delisting - the qualifying rules are basically not being listed on a 'recognised stock exchange' and being shares in a trading company. AIM shares in trading companies generally qualify (*) because while they are listed on AIM, AIM is not a 'recognised stock exchange'; if one of them delists even from AIM, it still qualifies, now because it's not listed on any stock exchange, 'recognised' or not.

Of course, it might well be a good idea to roll over an AIM holding that is about to delist, because of the likely loss of value and because it will be much more difficult to roll it over if it subsequently ceases to qualify (e.g. by becoming an investment company). But it isn't actually necessary in order to keep the exemption.

(*) Though watch out for ones that are listed on foreign 'recognised stock exchanges' as well as on AIM: that will cause them not to qualify. I.e. being on AIM is not actually an active qualification for the exemption - it is simply a way for shares to be tradable without in itself disqualifying them for the exemption.

Gengulphus

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Re: IHT - gifts from income

#17755

Postby Lootman » December 23rd, 2016, 3:34 pm

Gengulphus wrote:in the case of delisting - the qualifying rules are basically not being listed on a 'recognised stock exchange' and being shares in a trading company. AIM shares in trading companies generally qualify (*) because while they are listed on AIM, AIM is not a 'recognised stock exchange'; if one of them delists even from AIM, it still qualifies, now because it's not listed on any stock exchange, 'recognised' or not.

(*) Though watch out for ones that are listed on foreign 'recognised stock exchanges' as well as on AIM: that will cause them not to qualify. I.e. being on AIM is not actually an active qualification for the exemption - it is simply a way for shares to be tradable without in itself disqualifying them for the exemption.

That's interesting because in the case of one of my AIM holdings - GW Pharma - it is also listed on the US NASDAQ market. It's recent announcement that it will de-list from AIM is actually a decision to list only on NASDAQ from now on. So it's not ceasing to qualify - it never did.

Gengulphus wrote:Of course, it might well be a good idea to roll over an AIM holding that is about to de-list, because of the likely loss of value and because it will be much more difficult to roll it over if it subsequently ceases to qualify (e.g. by becoming an investment company). But it isn't actually necessary in order to keep the exemption.

Yes, that's what I did twice recently. By selling and quickly rolling over into another qualifying AIM share, I rendered moot any uncertainty about whether the original holding will continue to be exempt or not. As well as avoid having to sell an unlisted share on a "matched bargain" basis.

There's another risk with this strategy. You could carefully cultivate an IHT-exempt portfolio of AIM shares for decades and then HMRC could change the rules. That goes for any IHT strategy and not just this one, of course, which is why it is a good idea to have several concurrent mitigation strategies in place.

So I certainly would not rely only on the AIM exemption, quite aside from the obvious market risks of having most of one's net worth in AIM shares.

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Re: IHT - gifts from income

#17760

Postby PinkDalek » December 23rd, 2016, 3:58 pm

Lootman wrote:
That's interesting because in the case of one of my AIM holdings - GW Pharma - it is also listed on the US NASDAQ market. It's recent announcement that it will de-list from AIM is actually a decision to list only on NASDAQ from now on. So it's not ceasing to qualify - it never did.


Have you seen this?:

AIM DELISTING – FREQUENTLY ASKED QUESTIONS:
http://files.shareholder.com/downloads/ ... 182016.pdf

It includes:

Based on historic correspondence with HMRC, the Company’s understanding is as follows (but it should be noted that   
the Company has not taken steps to confirm the current position with HMRC and therefore the following should not be
relied upon by Shareholders without taking further advice):

– Following AIM Delisting, Ordinary Shares should continue to be accepted by HMRC as qualifying as unlisted/
unquoted securities for the purposes of certain specific UK tax rules (notably, the UK inheritance tax business
property relief rules). Therefore, those Shareholders who elect to continue to hold GW’s unlisted Ordinary Shares
should continue to be regarded as holding unlisted/unquoted securities under those same rules


It then continues similarly re ADRs.

However, that is based, as they say, on historic correspondence. NASDAQ itself does feature here as a "Recognised Stock Exchange" so further investigation may be required:

https://www.gov.uk/government/uploads/s ... e2-rse.pdf

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Re: IHT - gifts from income

#17768

Postby PinkDalek » December 23rd, 2016, 4:32 pm

Lootman wrote:...


PS This suggests that GW Pharma doesn't qualify which, not unexpectedly, puts into doubt what I quoted from them earlier in the thread:

https://www.sharesmagazine.co.uk/articl ... aim-stocks

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Re: IHT - gifts from income

#17775

Postby Lootman » December 23rd, 2016, 5:08 pm

PinkDalek wrote:
Have you seen this?:
AIM DELISTING – FREQUENTLY ASKED QUESTIONS:
http://files.shareholder.com/downloads/ ... 182016.pdf

Thank you and, no, I hadn't seen that although I did get a notification from my broker. Since I didn't want either a US security (and especially not an ADR) nor an unlisted security (probably not possible within an ISA anyway), I sold.

I rolled over into another AIM share, so I suspect the only issue is that if GW is deemed to be non-exempt for IHT purposes, then I need to wait 2 years until the new holding qualifies under the normal rules.

Your second link appears to further indicate GW will probably not be regarded as exempt but, for now, it remains on my "cheat list" of AIM shares for my children to resolve upon my demise.

It was a nice little earner for me, doubling during my holding period.

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Re: IHT - gifts from income

#17802

Postby Gengulphus » December 23rd, 2016, 7:44 pm

Lootman wrote:That's interesting because in the case of one of my AIM holdings - GW Pharma - it is also listed on the US NASDAQ market. It's recent announcement that it will de-list from AIM is actually a decision to list only on NASDAQ from now on. So it's not ceasing to qualify - it never did.

Well, it might have done at some point in the past, if NASDAQ wasn't a 'recognised stock exchange' at the time, but what PinkDalek has dug up makes it fairly clear that it is one now, and so GW Pharma is indeed not ceasing to qualify now - it might have qualified once, but if so, it ceased to qualify whenever it was that NASDAQ was designated as a 'recognised stock exchange'.

And my immediate thought when I saw your comment was "but surely NASDAQ isn't one?" - i.e. I'd somehow picked up the impression in the past that it wasn't. But actually the most likely time for me to have picked up that impression is around the time of the tech boom, when I dealt with the similar rules about 'gift hold-over relief' for CGT, so that impression could easily be over 15 years out of date! Or it could just have been wrong...

Lootman wrote:There's another risk with this strategy. You could carefully cultivate an IHT-exempt portfolio of AIM shares for decades and then HMRC could change the rules.

Indeed - all it would take is an order by the Commissioners for HMRC under section 1005 of the Income Tax Act 2007 (http://www.legislation.gov.uk/ukpga/2007/3/section/1005) to make AIM a 'recognised stock exchange', at any time prior to one's death...

Gengulphus

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Re: IHT - gifts from income

#17808

Postby Lootman » December 23rd, 2016, 8:25 pm

Gengulphus wrote:Well, it might have done at some point in the past, if NASDAQ wasn't a 'recognised stock exchange' at the time, but what PinkDalek has dug up makes it fairly clear that it is one now, and so GW Pharma is indeed not ceasing to qualify now - it might have qualified once, but if so, it ceased to qualify whenever it was that NASDAQ was designated as a 'recognised stock exchange'.

To nitpick just a little, it ceased to qualify EITHER when NASDAQ became a recognised stock exchange or when GW was first listed on NASDAQ, whichever came later.

A little searching reveals that the company was started in 1998, was listed on AIM in June, 2001, and was listed on NASDAQ in May 2013. So it ceased to qualify either in May 2013 or when Nasdaq was recognised, if that was later, which I doubt.

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Re: IHT - gifts from income

#18498

Postby DrFfybes » December 29th, 2016, 9:28 am

Lootman wrote:
Tempi wrote:
Gengulphus wrote:.....I.e. in practical terms, you basically need to suggest to the beneficiary that they continue to run the portfolio until your death in the way that you would have done to maintain the IHT exemption.
Gengulphus


Or until at least 7 years has passed from the date of the original gift, I assume....

Of course, because gifts that are more than seven years old do not have to be declared at all.

What the AIM route does is reduce the waiting period from seven years to two years if (and only if) the rules are followed. Taking care, as noted, to roll over those AIM holdings that de-list, cease to be qualifying or are sold.


A slight aside, but if you intend to do this then you need to do it whilst your mum still has all her faculties.

Octopus etc will only deal via an advisor. We tried to do the same for MrsF's mother and transfer some of her share holdings to AIM, but under PoA as she had dementia. The advisor came back and said their compliance dept wouldn't let him make the transaction. Despite the fact the M-I-L had expressed wishes to avoid IHT, there was the interpretation that what we were doing was for our benefit rather than for the benefit of M-I-L, and so could not be done under PoA.

Paul

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Re: IHT - gifts from income

#18655

Postby mutantpoodle » December 29th, 2016, 4:02 pm

and if you dont think IHT 400 is complicated enough wait until you try and complete IHT 412
on which you state have you held for 2 years?

but then because you sold and reinvested, neither the first nor second share was held for two years but the funds involved WERE !

try and set that out on the 412

NIGHTMARE........!! believe me!


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