Gifts out of Income for IHT Purposes.

[JonE]

HMRC rules per IHTM14243 recognise that a donor could effectively 'assign' an income from share dividends by establishing a specific link to that source and regularly gifting that income even though the amounts of each gift will inevitably vary. Covering school fees is also mentioned as an example where the recognition of a pattern of gifts is not disturbed by variations in the size of the gift:
https://www.gov.uk/hmrc-internal-manual ... /ihtm14255

However, that page also expresses the view that a series of gifts which seem to form a pattern but which includes an exceptionally high value gift would cause consideration of whether the 'excess over normal' part of that gift should be disallowed. I can see that this might be a reasonable anti-abuse measure when gifts are made from general income at the discretion of the donor but would a disallowance be applied in all circumstances?

The specific circumstance I have in mind is where a monthly gift to a specific donee has always exactly matched monthly Premium Bond prizes received by the donor (so very clearly 'income' with no element being 'a return of capital') in the range zero to whatever but the prize (and therefore gift) value in some future, exceptional month could (in theory) run into thousands.

It is purely a matter of chance beyond the control of the donor whether PB prizes in a month total zero or thousands. If 100% of that source of unbudgeted, surplus income is (rather than being unspent and merely morphing into capital over time) regularly and unfailingly gifted in full to the same individual then doesn't that establish a clear pattern and, if it does, why should the whole of any and every every such (fully documented & traceable) gift not be allowed? Any known cases indicating HMRC real-world approach and practice? No good asking HMRC as they'll almost certainly say something along the lines that they'll only comment once a taxable event has taken place.

Please accept that discussion of gifting any of the capital value of PB holdings would be off-topic.

Cheers!

[tjh290633]

My understanding is that if you make regular gifts by standing order or direct debit, and that they do not affect your standard of living, then they count as gifts out of income.

Otherwise you have to prove their status. I'm not sure how the gift of a major win, from premium bonds, the horses, or whatever, would stand up.

TJH

[Grumpsimus]

I regularly give gifts out of income for IHT purposes to my Grand daughter, which are invested in a Junior SIPP and a Junior ISA. I have written a letter documenting this.

I have doubts about if giving gifts equal to the prizes from Premium Bonds you own, would really work in these circumstances. It would not appear to meet the requirement of being regular gifts, anyone who holds Premium Bonds knows the prizes are irregular, sometimes nothing, then a small prize, infrequently a large prize.

TJH has already mentioned the possibility of of major win. I suspect that HMRC may well regard this as capital, particularly if it greatly exceeded your normal income. I think may be handing a rather difficult argument with HMRC to your executors.

If you retain ownership of the PBs they will of course form part of your estate.

[DrFfybes]

My understanding is that if you make regular gifts by standing order or direct debit, and that they do not affect your standard of living, then they count as gifts out of income.

Otherwise you have to prove their status. I'm not sure how the gift of a major win, from premium bonds, the horses, or whatever, would stand up.

The difference between Premium Bonds and horse/lottery wins is that with PBs you keep your capital, so it is more of an investment than a gamble.

Also The NS&I website itself under "How do I buy Premium Bonds" says

Each investment must be at least £25.

so even the Govt says they're an investment, and on the same page they describe the returns from them as "Income".

I suspect were you suddenly to win big and gift the money then HMRC might take an interest, but given the Govt owned organisation's own terminology coupled with an established pattern of distributing the income from them then it would make an interesting court case

Please accept that discussion of gifting any of the capital value of PB holdings would be off-topic.

Spoilsport.

Paul

[Lootman]

Please accept that discussion of gifting any of the capital value of PB holdings would be off-topic.

Spoilsport.

Yes, although I am aggressive about seeking to minimise the IHT that will be due on my estate, I do not bother with gifts from income. Partly because of all the (uncertain in some cases as here) rules and required documentation. And partly because income is rarely more than 5% of your capital and so it really does not have the impact I want.

In fact all gifts from income really achieve is that it stops your taxable estate from increasing n value, rather than actually decreasing it. And it is not like the nil rate band is ever increased for inflation.

I would make the effort in other strategies, of which there are several. And PBs would be a good candidate to gift from capital since they cannot be held as joint tenants with your beneficiary.

[SalvorHardin]

Back in the dim and distant when I was working, I encounted several cases where clients were engaging in all sorts of IHT avoidance strategies. Gifts out of income were often considered to be the poor relation of trusts and gift inter vivos life insurance policies, yet they are a very effective way of avoiding IHT.

The most important thing is to ensure that there is a clear audit trail showing that the gifts are made out of genuinely surplus income and not disguised capital. If not the Revenue is highly likely to look closely at everything.

In one case which was queried by the Revenue's probate department, the accountant had copies of the client's own budget estimates and actual spending for several tax years. The Revenue was happy to accept this.

Anyone making gifts to avoid IHT should watch out that they don't derive any benefit from the gifts after being made. These are classified as "gifts with reservation", where the donor continues to benefit from the gift (e.g. gift a house but continue to live there rent-free) and are added back into the estate for IHT purposes. One case I heard of consisted of a classic car being given to a relative where the donor was still able to drive it without paying anything on "special occasions" (I believe that a fairly substantial percentage of the value of the car was treated as falling back into the estate).

There is scope for a bit of give and take in these situations (or at least there used to be). A non-IHT case I knew of where the Revenue was quite flexible concerned an elderly sheepdog who was more of a pet but still did a bit of work on the farm. The Revenue accepted that half of the costs were deductible as per a working dog. Whereupon the farmer pushed his luck by claming that the deductible half was the front half and since that was where all the food went then the dog's food should be fully deductible (I changed jobs before hearing the outcome).

Antiques are an interesting way to avoid IHT, given that there is massive scope for "flexible" valuations. Sometimes the deceased's house would have contained a lot of moderately valuable antiques, mostly bought for cash, many of which allegedly end up in the homes of relatives before the probate valuation was conducted.

[scrumpyjack]

Spoilsport.

Yes, although I am aggressive about seeking to minimise the IHT that will be due on my estate, I do not bother with gifts from income. Partly because of all the (uncertain in some cases as here) rules and required documentation. And partly because income is rarely more than 5% of your capital and so it really does not have the impact I want.

In fact all gifts from income really achieve is that it stops your taxable estate from increasing n value, rather than actually decreasing it. And it is not like the nil rate band is ever increased for inflation.

I would make the effort in other strategies, of which there are several. And PBs would be a good candidate to gift from capital since they cannot be held as joint tenants with your beneficiary.

i have made very large absolute gifts (now more than 7 years ago) but also for the last 5 years have used substantial gifts out of income to my daughter as well (properly documented). One reason for this is that I want my daughter to treat the monthly standing order as disposable income that she can spend. She is naturally frugal and if I just give her another large slug of capital, it will just go into shares in her HL account rather than being used to help make life easier for her family.

[Lootman]

Anyone making gifts to avoid IHT should watch out that they don't derive any benefit from the gifts after being made. These are classified as "gifts with reservation", where the donor continues to benefit from the gift (e.g. gift a house but continue to live there rent-free) and are added back into the estate for IHT purposes. One case I heard of consisted of a classic car being given to a relative where the donor was still able to drive it without paying anything on "special occasions" (I believe that a fairly substantial percentage of the value of the car was treated as falling back into the estate).

Does that apply to gifts from income?

So for example if I give you £5,000 from income but then say to you "Don't spend it as I may need it back" then am I essentially reserving a benefit?

Antiques are an interesting way to avoid IHT, given that there is massive scope for "flexible" valuations. Sometimes the deceased's house would have contained a lot of moderately valuable antiques, mostly bought for cash, many of which allegedly end up in the homes of relatives before the probate valuation was conducted.

As an executor I was advised to put a valuation for "chattels", to cover the household items I had already retrieved from the deceased's home. It was suggested to me that £500 was a typical amount to use that would not invite scrutiny.

[SalvorHardin]

Anyone making gifts to avoid IHT should watch out that they don't derive any benefit from the gifts after being made. These are classified as "gifts with reservation", where the donor continues to benefit from the gift (e.g. gift a house but continue to live there rent-free) and are added back into the estate for IHT purposes. One case I heard of consisted of a classic car being given to a relative where the donor was still able to drive it without paying anything on "special occasions" (I believe that a fairly substantial percentage of the value of the car was treated as falling back into the estate).

Does that apply to gifts from income?

So for example if I give you £5,000 from income but then say to you "Don't spend it as I may need it back" then am I essentially reserving a benefit?

If you didn't need the money then it is a gift from income. That you've imposed conditions is a very strong indicator that it isn't a gift out of income. Bear in mind that a gift is the voluntary transfer of property where the recipient receives all of the property rights (in particular the right to exclude, so the gift giver has no right to use the property once it has been gifted).

HMRC probably wouldn't consider this to be a gift in the first place because you are imposing conditions which severely restrict how they can spend it. Now how the Revenue could prove it is another matter altogether (which is why many gifts are made in cash, or in the form of goods, which IMHO is one of the reasons why the state is increasingly favouring the elimation of cash).

There are a few exceptions to the restrictions applying to the gift, such as gifting property but as part of the gift you impose a restriction on how they can use it but you do not retain any property rights in the gift (so it is a gift). For example, gifting land but adding a covenant which means that the land can only be used for farming.

The main type of gift with reservation that I used to encounter was where the parents had gifted the house to their children but then continued to live in it rent-free. In order to make it a gift the parents would either have to move out or pay market rent (and be treated as a tenant). Lots of solicitors have articles on this, here's one linked below:

https://www.gnlaw.co.uk/news/gift-with-reservation-of-benefit-iht/

Another thing to watch out for when making gifts is if you get something back in return, because this could turn the arrangement into a contract.

As to the valuation of chattels, the Revenue is really interested in valuable individual items such as jewelry, classic cars and high-priced antiques (items which might appear on Antiques Roadshow but not on Bargain Hunt). In my experience they really aren't all that bothered about getting accurate valuations of televison sets, carpets, non-antique furniture and most other household items and will happily accept broad brush estimates. And there is always plenty of scope for experts to disagree about the valuation of items, and to justify a much lower valuation if it is for probate purposes (what value to put on a pedigree cat, for example).

[DrFfybes]

In fact all gifts from income really achieve is that it stops your taxable estate from increasing n value, rather than actually decreasing it. And it is not like the nil rate band is ever increased for inflation.

We have an average age of 60, and don't know what the future will hold, but we do know that we have plenty to live on, in fact more than enough. Also our Platinum Plated Index Linked DB Pensions that only cost us about 25% of earnings compared to the equivalent salary in the private sector make the future a lot more certain

So for us GFI works well, it prevents our Estate increasing apart from capital gains and in another decade or so we will think about some larger gifts or whatever strategies are available at that time for mitigating IHT. And to be honest we're rather hoping that any GFI made in the next 15 or so years will fall outside the 7 year rule anyway.

Paul

[stevensfo]

So what happens if a parent gives 9000 quid to their son/daughter every year to pay the university fees? Accommodation costs etc?

If the parent dies before 7 years, do their kids have to pay tax on it?


Steve

[ReformedCharacter]

So what happens if a parent gives 9000 quid to their son/daughter every year to pay the university fees? Accommodation costs etc?

If the parent dies before 7 years, do their kids have to pay tax on it?


Steve

This:

https://techzone.abrdn.com/public/iht-est-plan/Tech-guide-IHT-Exemption

Seems to suggest that such payments would be exempt.

RC

[Lootman]

So what happens if a parent gives 9000 quid to their son/daughter every year to pay the university fees? Accommodation costs etc?

If the parent dies before 7 years, do their kids have to pay tax on it?

I believe that adult children who are still in full-time education are considered to be dependents, and so such transfers would be considered as normal parental support rather than potentially exempt transfers.

I do sometimes wonder what the status is for acts of generosity towards one's adult children that do not fall into the category of gifts. So for example if I take one of my kids to New York for a long weekend and I pay for everything, could an over-zealous executor try and argue that was a gift from capital?

To my mind it is not a gift as I got something in return - the pleasure of their company.

[DrFfybes]

So what happens if a parent gives 9000 quid to their son/daughter every year to pay the university fees? Accommodation costs etc?

If the parent dies before 7 years, do their kids have to pay tax on it?

Steve

No, the recipient of the gift keeps all of it, the tax would come ferom the Estate.

However, as mentioned if it was their child rather than grandchild, they would still be a dependant.

Paul

[Lootman]

If the parent dies before 7 years, do their kids have to pay tax on it?

No, the recipient of the gift keeps all of it, the tax would come from the Estate.

True although if there is insufficient money in the estate to pay the IHT then the taxman can go after recipients of gifts from the deceased in the prior 7 years. How often that happens and how successful such collections are, I know not.

In a sense the kids always pay the tax anyway, since their inheritance is reduced by that amount.

[JonE]

I have doubts about if giving gifts equal to the prizes from Premium Bonds you own, would really work in these circumstances. It would not appear to meet the requirement of being regular gifts, anyone who holds Premium Bonds knows the prizes are irregular, sometimes nothing, then a small prize, infrequently a large prize.

The requirement is not specifically that gifts be 'regular' but that they be 'normal' for the donor (with a regular pattern being one potential indicator of 'normal'). A proven habit of always gifting whatever sum is received from Ernie looks to me like a 'normal' pattern of giving. It seems that HMRC tends to take one year with another and fluctuations from one month to another (as also applies to HMRC's example of dividend income) would not automatically fail the 'normal' test. That very uncertainty of income from PB means I don't budget for any such income, do not rely on any such income and, in fact, don't need to meet normal expenditure from any such income (it just accumulates in my 'general fund' and morphs into capital).

I suspect that HMRC may well regard [a major win] as capital, particularly if it greatly exceeded your normal income

I am totally confident that it is income when received - definitely not capital! Over time (2 years is suggested by HMRC) unspent income might be regarded as having been absorbed into capital but that is not relevant to this circumstance.

...given [NS&I's] own terminology coupled with an established pattern of distributing the income from them then it would make an interesting court case

Indeed, having to go to Tribunal would be a gotcha and is why I was asking whether there are any pointers to HMRC approach. Mind you, HMRC seems to now be so under-staffed with such a skills shortfall in staff they have managed to retain that they can't even embark on 'obvious' evasion investigations so may not have the appetite to squander resources trying to strong-arm a logically-dodgy interpretation for a once-in-a-blue-moon event.

In fact all gifts from income really achieve is that it stops your taxable estate from increasing n value [...] I would make the effort in other strategies

My thought is that the IHT-related objectives of my other strategies could be somewhat frustrated if my estate were to suddenly and unexpectedly increase in value by a significant sum due to a low-probability PB event. The words tail, wag & dog might spring to mind but the main point is that I want to gift surplus income and the thought arose that a direct linkage to this specific source of surplus income might cover the 'risk' of unforeseeable ERNIE generosity so that my other strategies need not address that vague possibility.


Overall, I can see no problem at all with gifting of typical-value PB income qualifying as exempt. Why would this treatment not be equally valid if there were, outwith the donor's control, a high-value PB 'prize' (and therefore gift) in the mix over the years? It would surely be inconsistent and irrational to apply a subjective assessment to disqualify any gifts (or part of gifts) above some arbitrary threshold. There again, we're talking taxation so logic doesn't necessarily get a look-in.

The manual states with regard to unusually large amounts:- "If a particular gift is in a in a different category from those which are normal because of its size, further evidence will be needed to see if and how it fits in with the normal pattern." My current view/hope is that the readily-documented proof that each and every PB 'prize' is invariably gifted to a single donee should be sufficient evidence that any unusually large amount in the set of prizes/gifts is clearly just part of the 'normal' pattern (in exactly the same way that amounts of zero in the prize/gift set are part of the 'normal' pattern).

Cheers!

[Grumpsimus]

You seem to have convinced yourself that you are right. You don't need to convince me or the other people on this board. However, the real people you need to convince are HMRC and your Executor, at some date in the future when you will not be around.

I don't wish to drag out this discussion, but you seem to suggest that HMRC might not bother with this sort thing, However, I have recently heard from two different sources that HMRC are taking an increasing interest in IHT. My Financial Planner has told me that HMRC are increasingly querying Gifts out of Income and makes detailed requests for supporting information, which they are involved in supplying

I was also talking to a lawyer who deals with probate cases and his view was HMRC was taking far more interest in this area and have been launching more formal investigations. His view was that HMRC generally disliked the Gifts out of Income exemption, they would often query this. It can be an easy win for HMRC, particularly where adequate supporting documentation can't be produced.

You also need to convince your Executor, because this may end as a Tax Tribunal case, which they consider is not worth the money, time and effort to fight.

[scrumpyjack]

I was also talking to a lawyer who deals with probate cases and his view was HMRC was taking far more interest in this area and have been launching more formal investigations. His view was that HMRC generally disliked the Gifts out of Income exemption, they would often query this. It can be an easy win for HMRC, particularly where adequate supporting documentation can't be produced.

It really is not HMRC's place to 'like' or 'dislike' tax legislation. Their job is to collect the tax legally due rather than to enforce the law as they would like it to be!

I guess if challenged they would say they are simply trying to enforce the law as it is, but it is unfortunate, to say the least, that if they get into a legal dispute with a taxpayer and lose, they don't have to pay the taxpayer's legal costs. The taxpayer's legal fees in successfully warding off HMRC are not even tax deductible!

This means it really is not worth in any way 'sailing too close' to the wind!

[Lootman]

I was also talking to a lawyer who deals with probate cases and his view was HMRC was taking far more interest in this area and have been launching more formal investigations. His view was that HMRC generally disliked the Gifts out of Income exemption, they would often query this. It can be an easy win for HMRC, particularly where adequate supporting documentation can't be produced.

It really is not HMRC's place to 'like' or 'dislike' tax legislation. Their job is to collect the tax legally due rather than to enforce the law as they would like it to be!I

I guess if challenged they would say they are simply trying to enforce the law as it is, but it is unfortunate, to say the least, that if they get into a legal dispute with a taxpayer and lose, they don't have to pay the taxpayer's legal costs. The taxpayer's legal fees in successfully warding off HMRC are not even tax deductible!

I can easily imagine that HMRC "targets" estates that claim GFI exemptions even if you and I think that is unfair. The mere act of claiming GFI will trigger their attention and it is simple for them to ask for a lot of supporting documentation and then punish those whose submissions are speculative. And trying to do GFI from premium bond winnings sets a precedent that they might want to quash.

I suspect that any claim for GFI immediately increases the risk of adverse scrutiny, rather like how claiming tax relief for a home office does for self-assessment returns.

The vast majority of probate submissions are rubber-stamped with only the most cursory of checks. Unless you enjoy conflict, and some may, then one might want to keep things simple for your executor. I would not want to be on my deathbed worrying that I landed my kids with a whole world of grief just because I had a "clever" but untested idea about how to avoid tax.

[scrumpyjack]

The vast majority of probate submissions are rubber-stamped with only the most cursory of checks. Unless you enjoy conflict, and some may, then one might want to keep things simple for your executor. I would not want to be on my deathbed worrying that I landed my kids with a whole world of grief just because I had a "clever" but untested idea about how to avoid tax.

That is one reason I have always, as Executor, used a reputable firm of solicitors to submit the IHT400. The result has been that HMRC have never raised any queries and everything goes through much quicker if the forms have been submitted by a reputable firm of solicitors. The solicitors have worked on a fixed fee basis with me providing all the information, with supporting documentation, so they can fill out the forms in one go. It has been a very cost effective approach. (These were all estates with significant IHT payable)