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£3,000 annual gifts from capital, and timing.

Practical Issues
Lootman
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£3,000 annual gifts from capital, and timing.

#429913

Postby Lootman » July 23rd, 2021, 12:28 pm

Given that gifts to mitigate IHT have been talked to death here, I really should know this, but find that I do not.

I have made £3,000 non-PET gifts from capital in previous years. In some cases I made no gift one year and then made a £6,000 gift the following year, as allowed by the rules. So far, so good. But how about this situation?

1) Year One - I make a £1,000 gift to X. No other gifts.
2) Year Two - I make a £2,000 gift to X, and designate it as a "make up" gift for Year One. No other gifts.

Question: In Year Three can I make a £6,000 gift to X for years Two and Three? Or only a £3,000 gift to X for year Three?

pje16
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Re: £3,000 annual gifts from capital, and timing.

#429916

Postby pje16 » July 23rd, 2021, 12:37 pm

You can't carry back, forward only
so nil in year 1 means 6 in year 2
and you can only carry forward for one year (ie no rollup of 2 3 or 4 years)

Gengulphus
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Re: £3,000 annual gifts from capital, and timing.

#429927

Postby Gengulphus » July 23rd, 2021, 1:39 pm

Lootman wrote:Given that gifts to mitigate IHT have been talked to death here, I really should know this, but find that I do not.

I have made £3,000 non-PET gifts from capital in previous years. In some cases I made no gift one year and then made a £6,000 gift the following year, as allowed by the rules. So far, so good. But how about this situation?

1) Year One - I make a £1,000 gift to X. No other gifts.
2) Year Two - I make a £2,000 gift to X, and designate it as a "make up" gift for Year One. No other gifts.

Question: In Year Three can I make a £6,000 gift to X for years Two and Three? Or only a £3,000 gift to X for year Three?

Basically, the 'designate it as a "make up" gift for Year One' part of your description is totally ineffective - you can state that you're doing that, but such a statement from you has zero effect on the IHT outcome. And to be clear, such a statement from your executor also has zero effect on the IHT outcome - this isn't a pedantic point about who actually tells HMRC about the gifts!

The '£3,000 annual gifts' rule says that in tax year N, you can give £3,000 totally free of IHT (*), plus a further amount which is £3,000 minus the total you gave under this rule in Year N-1 or £0 if that is negative (note that the amount you can give is completely determined by the amounts you actually gave and the dates you actually made the gifts - no 'designating' or 'backdating' of gifts involved). See https://www.gov.uk/hmrc-internal-manual ... /ihtm14144 to verify this.

So in your example, you can give £3,000 + (£3,000 - £2,000) = £4,000 in Year Three totally free of IHT.

(*) By which I mean that it's neither immediately subject to IHT, nor potentially subject to IHT as a PET if you die in the next 7 years.

Gengulphus

Lootman
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Re: £3,000 annual gifts from capital, and timing.

#429949

Postby Lootman » July 23rd, 2021, 3:04 pm

Gengulphus wrote:Basically, the 'designate it as a "make up" gift for Year One' part of your description is totally ineffective - you can state that you're doing that, but such a statement from you has zero effect on the IHT outcome. And to be clear, such a statement from your executor also has zero effect on the IHT outcome - this isn't a pedantic point about who actually tells HMRC about the gifts!

Funnily enough it was my accountant who came up with the idea that I should annotate (which might be a better word than "designate") when a gift should count as a prior year's gift. And clearly there is some merit to that - if I make a £6,000 gift from capital of which £3,000 is for a prior year as allowed by the rules, then it is important that my executor realises that and treats it that way, rather than as a £6,000 PET. I am not even sure the former needs to be declared anyway.

That said I accept that you are correct here. I think I knew that but wanted to hear it from someone else. My oldest son's birthday is coming up and I was debating whether to give him a £5,000 gift or a £2,000 gift. Looks like the former is the way to go.

Eboli
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Re: £3,000 annual gifts from capital, and timing.

#429997

Postby Eboli » July 23rd, 2021, 8:28 pm

I wonder, lootman, if you are confusing exemptions here.

A transfer of value is a disposition by which the transferor's estate is reduced. There is nothing to say it has to be out of capital or not. That, for this purpose, is irrelevant.

A chargeable transfer of value is a transfer that is either immediately chargeable or not immediately chargeable and not exempt and which is made within 7 years of death. It may include a potentially exempt transfer that has become a chargeable transfer.

Accordingly, the annual exemption provides that the first £3,000 transferred in any tax year is an exempt transfer (and therefore cannot be either a potentially exempt transfer or a chargeable transfer). In addition, in any tax year an amount equal to the amount the annual exemption of the previous year was not used, is also exempt.

So in your example:

Y1 an exempt gift is made of £1,000. This can never be a PET or chargeable.
Y2 an exempt gift is made of £2,000. This can never be a PET or chargeable. (The annual exemption for Y2 was £5,000)
Y3 a gift of £6,000 is made. The annual allowance for Y3 is £4,000. So £4,000 is exempt and £2,000 is a PET unless another exemption applies to it.

Eb.

Lootman
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Re: £3,000 annual gifts from capital, and timing.

#430078

Postby Lootman » July 24th, 2021, 9:27 am

Eboli wrote:A chargeable transfer of value is a transfer that is either immediately chargeable or not immediately chargeable and not exempt and which is made within 7 years of death. It may include a potentially exempt transfer that has become a chargeable transfer.

Accordingly, the annual exemption provides that the first £3,000 transferred in any tax year is an exempt transfer (and therefore cannot be either a potentially exempt transfer or a chargeable transfer). In addition, in any tax year an amount equal to the amount the annual exemption of the previous year was not used, is also exempt.

So in your example:

Y1 an exempt gift is made of £1,000. This can never be a PET or chargeable.
Y2 an exempt gift is made of £2,000. This can never be a PET or chargeable. (The annual exemption for Y2 was £5,000)
Y3 a gift of £6,000 is made. The annual allowance for Y3 is £4,000. So £4,000 is exempt and £2,000 is a PET unless another exemption applies to it.

The formal language there is a bit confusing but you get the same answer as the others so I will take this as further confirmation that I can make an exempt gift (transfer, in your vernacular) of up to £5,000 this year.

By the way, what would constitute an "immediately chargeable transfer"? I assume there the charge is IHT but that only applies upon death, unless there is some way an executor can make a retrospective transfer out of the deceased's estate.

I have always taken the view there is no need to report such transfers at the time or in an annual self-assessment tax return. It is sufficient to keep a record of such gifts in case an executor needs them, and only then if they were not exempt at the time or have not become exempt by virtue of more than 7 years having passed.

In the end it is all down to what the executor declares on the IHT forms, which will be based on either annotations from the deceased or else any independent research that executor chooses to perform.

Gersemi
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Re: £3,000 annual gifts from capital, and timing.

#430080

Postby Gersemi » July 24th, 2021, 9:34 am

Lootman wrote:
Eboli wrote:A chargeable transfer of value is a transfer that is either immediately chargeable or not immediately chargeable and not exempt and which is made within 7 years of death. It may include a potentially exempt transfer that has become a chargeable transfer.

Accordingly, the annual exemption provides that the first £3,000 transferred in any tax year is an exempt transfer (and therefore cannot be either a potentially exempt transfer or a chargeable transfer). In addition, in any tax year an amount equal to the amount the annual exemption of the previous year was not used, is also exempt.

So in your example:

Y1 an exempt gift is made of £1,000. This can never be a PET or chargeable.
Y2 an exempt gift is made of £2,000. This can never be a PET or chargeable. (The annual exemption for Y2 was £5,000)
Y3 a gift of £6,000 is made. The annual allowance for Y3 is £4,000. So £4,000 is exempt and £2,000 is a PET unless another exemption applies to it.

The formal language there is a bit confusing but you get the same answer as the others so I will take this as further confirmation that I can make an exempt gift (transfer, in your vernacular) of up to £5,000 this year.



Lootman - from your original post I assumed you were in year 3, so as previous posters have said, you could make a PET of £4000 this year. Your reply here suggests you are in year 2, as you conclude that you can make a PET of £5000. I think it would clarify matters if you confirmed which it is.

Lootman
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Re: £3,000 annual gifts from capital, and timing.

#430082

Postby Lootman » July 24th, 2021, 9:38 am

Gersemi wrote:
Lootman wrote:
Eboli wrote:A chargeable transfer of value is a transfer that is either immediately chargeable or not immediately chargeable and not exempt and which is made within 7 years of death. It may include a potentially exempt transfer that has become a chargeable transfer.

Accordingly, the annual exemption provides that the first £3,000 transferred in any tax year is an exempt transfer (and therefore cannot be either a potentially exempt transfer or a chargeable transfer). In addition, in any tax year an amount equal to the amount the annual exemption of the previous year was not used, is also exempt.

So in your example:

Y1 an exempt gift is made of £1,000. This can never be a PET or chargeable.
Y2 an exempt gift is made of £2,000. This can never be a PET or chargeable. (The annual exemption for Y2 was £5,000)
Y3 a gift of £6,000 is made. The annual allowance for Y3 is £4,000. So £4,000 is exempt and £2,000 is a PET unless another exemption applies to it.

The formal language there is a bit confusing but you get the same answer as the others so I will take this as further confirmation that I can make an exempt gift (transfer, in your vernacular) of up to £5,000 this year.

Lootman - from your original post I assumed you were in year 3, so as previous posters have said, you could make a PET of £4000 this year. Your reply here suggests you are in year 2, as you conclude that you can make a PET of £5000. I think it would clarify matters if you confirmed which it is.

Sorry, yes, am in year two.

And so was wondering whether to make a gift of £2,000 or £5,000 this year. I would have made it £2,000 this year if that allowed a £6,000 gift next year, but evidently it does not.

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Re: £3,000 annual gifts from capital, and timing.

#430124

Postby Gengulphus » July 24th, 2021, 2:51 pm

Lootman wrote:By the way, what would constitute an "immediately chargeable transfer"? I assume there the charge is IHT but that only applies upon death, unless there is some way an executor can make a retrospective transfer out of the deceased's estate.

No, executors cannot make retrospective transfers out of the deceased's estate, but also no, IHT doesn't only apply upon death. Basically, all transfers of value out of your estate are considered by IHT, whether they happen during your lifetime or by inheritance after your death. Lifetime transfers are often exempt (e.g. when made to one's spouse or to a charity) or PETs (e.g. other gifts to individuals). "Immediately chargeable transfers" are those that are neither exempt nor PETs, and as their name suggests, IHT is charged on them when they happen, without waiting for the transferor's death. Gift transfers into trusts (other than charitable trusts and 'disabled trusts' (*)) are the case of immediately chargeable transfers I know of - PETs are basically gifts by individuals to other individuals or to 'disabled trusts', so such gift transfers aren't PETs and aren't exempt (at least not for the usual reasons). And the basis on which such gifts are charged to IHT is fundamentally that if such a gift brings the total of such gifts made in the last 7 years up to more than the IHT allowance, IHT is immediately charged on the excess of that total over the IHT allowance.

Warning: Just about everything I've said in that last paragraph is an oversimplification! If you want to try to get the full picture, start at https://www.gov.uk/hmrc-internal-manual ... /ihtm11000 and https://www.gov.uk/hmrc-internal-manual ... /ihtm14000 and allow plenty of time... And if you give up before you actually get the full picture, you're not alone!

(*) Description picked up from https://www.gov.uk/hmrc-internal-manual ... /ihtm04058 - I presume it means a type of trust for the support of someone disabled, not a trust that has been prevented from functioning! ;-)

Gengulphus

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Re: £3,000 annual gifts from capital, and timing.

#430126

Postby scrumpyjack » July 24th, 2021, 3:12 pm

Also don't forget that the £3,000 applies both to husband and wife so between you you can give £6,000 out of capital.

I make substantial monthly gifts to my daughter by standing order and keep records to demonstrate that this is within my spare income so it counts as gifts out of income. The standing order bit demonstrates 'habitual' and 'regularity'. One issue I have never explored is whether there is scope for husband and wife to keep their finances separate. One pays all the expenses of the couple and some of this comes out of their 'capital'. The other gives their surplus income (which is more or less all of it as they don't have any living expenses) to their chldren/grandchildren. I don't know whether such a strategy is feasible?

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Re: £3,000 annual gifts from capital, and timing.

#430130

Postby Kantwebefriends » July 24th, 2021, 3:45 pm

I hope the joint income manoeuvre is OK: we did it for a few years. The point was that I was a good deal likelier to die within seven years than my wife was, so her gifts might anyway prove to be exempt by her surviving seven years. Belt and braces.

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Re: £3,000 annual gifts from capital, and timing.

#430156

Postby Lootman » July 24th, 2021, 5:52 pm

Gengulphus wrote: IHT doesn't only apply upon death. Basically, all transfers of value out of your estate are considered by IHT, whether they happen during your lifetime or by inheritance after your death. Lifetime transfers are often exempt (e.g. when made to one's spouse or to a charity) or PETs (e.g. other gifts to individuals). "Immediately chargeable transfers" are those that are neither exempt nor PETs, and as their name suggests, IHT is charged on them when they happen, without waiting for the transferor's death. Gift transfers into trusts (other than charitable trusts and 'disabled trusts' (*)) are the case of immediately chargeable transfers I know of

Ah OK, fair enough, I was aware that transfers into trusts attracted a special tax treatment since you are effectively moving those assets to a place where they cannot be taxed, at least as an individual, because at that point you no longer own those assets. But otherwise I am not aware that gifts ever attract immediate tax or require disclosure.

As an aside I am a bit surprised that large transfers overseas are not subject to such a tax since effectively it will be near impossible to collect future taxes like IHT on those assets. But I guess exchange control liberalisation prevents any such controls.

scrumpyjack wrote:Also don't forget that the £3,000 applies both to husband and wife so between you you can give £6,000 out of capital.

I didn't! I gift one son and my wife gifts the other. That means they do not always get the same amount but over time it all works out equitably.

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Re: £3,000 annual gifts from capital, and timing.

#430158

Postby scrumpyjack » July 24th, 2021, 6:04 pm

Lootman wrote:
As an aside I am a bit surprised that large transfers overseas are not subject to such a tax since effectively it will be near impossible to collect future taxes like IHT on those assets. But I guess exchange control liberalisation prevents any such controls.


There are still provisions, I think, so that gifts of assets from a UK domiciled spouse to a non-uk domiciled spouse can be caught by IHT subject to a lifetime allowance of £650,000.

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Re: £3,000 annual gifts from capital, and timing.

#430159

Postby Lootman » July 24th, 2021, 6:10 pm

scrumpyjack wrote:
Lootman wrote:As an aside I am a bit surprised that large transfers overseas are not subject to such a tax since effectively it will be near impossible to collect future taxes like IHT on those assets. But I guess exchange control liberalisation prevents any such controls.

There are still provisions, I think, so that gifts of assets from a UK domiciled spouse to a non-uk domiciled spouse can be caught by IHT subject to a lifetime allowance of £650,000.

Yes, I believe so, although once the money and the surviving spouse have left the country, and the UK-domiciled spouse is dead, I imagine that in practice collection could be tricky :D

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Re: £3,000 annual gifts from capital, and timing.

#430569

Postby Eboli » July 26th, 2021, 8:15 pm

Lootman,

Gengulphus has answered the immediately chargeable transfer point. But it is worth saying that in the case of an immediately chargeable transfer, the IHT can be recomputed because of death, which can make it important to order gifts.

For example, a disposition to a discretionary trust would be (normally) an immediately chargeable transfer and would be taxable at the rate of tax of 20% (the lifetime rate of IHT). If death occurs within 5 years of such a gift the rate of tax increases to either 40%, or 32% or 24% dependent upon how many years elapse until death. As any threshold(s) at death are applied to gifts in chronological order beginning 7 years before death, it may be important to determine that any such threshold(s) are applied to dispositions that would otherwise attract the highest rate of tax (or increase in such rate. That will generally be failed PETs (which otherwise would attract tax of 40%) rather than the extra tax on immediately chargeable lifetime transfers (which might only attract a 4% increase).

Eb


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