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IHT and Normal expenditure

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PaulBullet
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IHT and Normal expenditure

#128116

Postby PaulBullet » March 26th, 2018, 5:02 pm

I am helping my father with his IHT planning

He has a large surplus in income and regularly spends this on gifts for his children and grandchildren

I have put together a spreadsheet that shows all his income and expenditure and it basically mimics the IHT403 form. I have then defined all the income as per the form and then the expenditure and gifts to show that he uses income for the gifts and not capital. I believe this will then be exempt for IHT.

This year he has had to put a new roof on his garage, the total costs was about 3-4,000, I would consider this not to be normal expenditure and as such I think he could use his savings to pay for this and then still gift the same amount without to whomever he wishes. what are others views?

His income is about 20-30k more than his normal expenditure if that makes a difference

Paul

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Re: IHT and Normal expenditure

#128179

Postby Kantwebefriends » March 26th, 2018, 11:38 pm

You might try the argument that it's reasonable to write the roof off over 5 years or ten.

Unfortunately you will have to apply for the exemption after the old boy's death so you won't know until then whether your plan has been successful. What you need is a precedent. Anyone?

PaulBullet
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Re: IHT and Normal expenditure

#128206

Postby PaulBullet » March 27th, 2018, 8:14 am

My argument would be that "this is what savings are for" and that a new roof is not normal expenditure but a capital expense.

Paul

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Re: IHT and Normal expenditure

#128210

Postby scrumpyjack » March 27th, 2018, 8:32 am

A follow on question to this. Where husband and wife have a joint account co-mingling income and expenditure, and give money to their children, how do you determine, on the death of the first spouse, who made the gifts and what is the relevant surplus income out of which the 'normal expenditure' gifts were made?

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Re: IHT and Normal expenditure

#128240

Postby Jabd2001 » March 27th, 2018, 10:23 am

@scrumpyjack, I think the usual assumption, if moneys are coming out of jointly held accounts, is that it is 50/50. That after all is the basis of taxation of interest on joint accounts.
If you want a different allocation, then best to keep some identifiable sole accounts from which such expenditure can be made, which is clearly attributable to one partner or the other. That might work, unless perhaps HMRC decide that the primary purpose of the arrangement is to save tax - say if assets were clearly transferred between spouses just before the gift was made..

Jabd2001
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Re: IHT and Normal expenditure

#128241

Postby Jabd2001 » March 27th, 2018, 10:26 am

I dont know how you would apportion surplus income. I guess ownership of income streams is usually easy to determine, since pensions are always in individual names, and I imagine usual household expenditure would be divided equally.
As with all things, I am sure it pays to keep good records and also to be clear about intentions at the time of giving.

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Re: IHT and Normal expenditure

#128253

Postby argoal » March 27th, 2018, 11:12 am

I would just double check that your assumptions on what is regarded as 'normal income' are correct and conform to the tax office definition before committing on this.

It can be a bit tricky in this area and not intuitive.

A couple of checks that spring to mind are:

1. Annutities are regarded as part 'income' and part 'return of capital'. That means you can't take 100% of annutity income into the calculation. Depending on when an annutity was take out (age and interest rate) the income element might be between 20%-60% of the annuity income. Pension income doesn't have this problem and is 100% treated as income.

2. Investment bonds that provide a tax free 5% income per year are generally treated as 100% return of capital for the first 20 years and only count as income once the initial sum has been taken as income. After 20 years there may well be a portion of income trearted as capital gain and therefore excluded from income as well.

From Pru Advisor https://www.pruadviser.co.uk/knowledge-literature/knowledge-library/normal-expenditure-out-of-income-exemption/?advsr=3&advtsr=6&q=Normal-expenditure-out-of-income

'Income is not defined in the IHT legislation but should be determined for each year in accordance with normal accountancy rules. It is not necessarily the same as income for income tax purposes. Income is the net income after payment of income tax.

Common sources of income are employment and self–employment, rents from property, pensions, interest and dividends. Payments received regularly may appear to be income but are in fact capital in nature. An example would be receipts from a discounted gift trust. Similarly, 5% withdrawals from an insurance bond would be capital.'


On the plus side - it may be possible to gift excess income from at least one previous tax year although there appears to be a bit of a grey area around what point previously received income is transformed into capital for IHT purposes.

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Re: IHT and Normal expenditure

#128307

Postby Lootman » March 27th, 2018, 1:55 pm

scrumpyjack wrote:A follow on question to this. Where husband and wife have a joint account co-mingling income and expenditure, and give money to their children, how do you determine, on the death of the first spouse, who made the gifts and what is the relevant surplus income out of which the 'normal expenditure' gifts were made?

What would be very useful would be to discover a way of making a gift in such a way that you can defer making the determination of which parent actually made the gift.

I've engaged in a few thought experiments around the idea of allowing the child to choose which parent the gift comes from, with the idea that he/she can make that determination later. That would probably involve making it a cash gift since cash is fungible, anonymous and portable.

Haven't tried it though.

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Re: IHT and Normal expenditure

#128336

Postby PinkDalek » March 27th, 2018, 3:03 pm

scrumpyjack wrote:A follow on question to this. Where husband and wife have a joint account co-mingling income and expenditure, and give money to their children, how do you determine, on the death of the first spouse, who made the gifts ...


HMRC Guidance (their view, which may be of relevance, although it relates primarily to the IHT account) at https://www.gov.uk/hmrc-internal-manual ... /ihtm15042 includes:

You should normally regard each account holder as beneficially entitled (IHTM15011) to the proportion of the account which is attributable to their contributions. So - if the deceased provided the whole of the money, the whole of the account at death should be included in the IHT400

and

When establishing the share based on the deceased’s contributions you should note that the true legal position is far from clear so it is important to establish the facts and obtain any relevant documents, such as application forms, withdrawal mandates, passbooks, terms and conditions of account before considering the legal and equitable rules.

There is more there and in the surrounding pages.

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Re: IHT and Normal expenditure

#128351

Postby PaulBullet » March 27th, 2018, 3:36 pm

IHT403 is broken down as follows

Income
Salary
Pensions
Interest/ISA's
Investments
Rents
Annuities
Other
Minus Tax

Net Income

Expenditure

Mortgage
Insurance
Household Bills
Traveling Costs
Entertainment
Holidays
Nursing Home Fees
Other

Total Expenditure

Surplus
Gifts Made

His income is easy to define as the first 3 income types so i dont see any problems defining income, my question was about normal expenditure

Paul

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Re: IHT and Normal expenditure

#128363

Postby scrumpyjack » March 27th, 2018, 4:12 pm

Thanks to all for your comments. Our income is simply dividends, pensions and interest out of which combined total living costs are paid.

I think I would take the view that the net unspent income is apportioned in the same proportion as the gross income between husband and wife, and it's probably best to kept records on this basis with the split of gift recorded. I think I would probably treat special dividends as normal income however large (eg Persimmon and Barratt)

At present none of this is a problem as gifts are well below the available unspent income but it could be if and when I can make up my mind about passing more on. It's a very difficult matter to decide, not the IHT planning side, but whom to give what to and when - what are their needs, what might they do with it (that one disapproves of!), which generation, dangers of grandchildren getting loads at 18, the need for fairness (whatever that is), virulent dislike of trusts etc etc and last but not least doing things before the red cloud descends.

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Re: IHT and Normal expenditure

#128369

Postby Lootman » March 27th, 2018, 4:28 pm

scrumpyjack wrote:It's a very difficult matter to decide . . . whom to give what to and when - what are their needs, what might they do with it (that one disapproves of!), which generation, dangers of grandchildren getting loads at 18, the need for fairness (whatever that is)

I think every case is different. I gave my children significant sums when I thought they had developed at least some maturity (e.g. had a job, had left home and could support themselves) - in their case mid-twenties. Gifts made like that when the donors are still fairly young increases the odds of satisfying the seven year rule (for gifts from capital).

Also important was that there was a specific need - in their case, to buy a house. It felt good to help them achieve something tangible and valuable with it, rather than just get a whole wodge of cash and then fritter it away.

As for fairness, the main element of that for us was that each child gets exactly the same amount. You probably noticed how important that was from about the age of three :D

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Re: IHT and Normal expenditure

#128386

Postby Jabd2001 » March 27th, 2018, 4:58 pm

I thought the ‘gifts from normal expenditure’ had to be ‘regular’ to qualify- ie some sort of recurring pattern over time, annual or monthly or at birthdays/Christmas for example.
Am I wrong?

I totally agree that fairness in relation to monetary gifts, from the perspective of children, means ‘exactly the same amount’ :D
Unless they are very unusual children or one has special needs. Even then, proceed with caution with any other approach...

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Re: IHT and Normal expenditure

#128436

Postby Lootman » March 27th, 2018, 7:29 pm

Jabd2001 wrote:I thought the ‘gifts from normal expenditure’ had to be ‘regular’ to qualify- ie some sort of recurring pattern over time, annual or monthly or at birthdays/Christmas for example. Am I wrong?

That is my understanding, although I think that it is sufficient that the INTENT was for the gifts to be regular. If circumstances change and such gifts are no longer deemed sustainable then I would like to think that would be viewed favourably.

More generally the decision whether to gift from capital or excess income is a matter of degree. The regular gift route is a useful way of increasing the fairly limited annual limits (3K a year, plus 250 for this and that). A gift from capital is where you prefer to offload larger amounts and make the assumption that you will live seven more years.

Personally I can't be arsed with the "gifts from income" thing. There are other options.

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Re: IHT and Normal expenditure

#128496

Postby Parky » March 28th, 2018, 8:43 am

Lootman wrote:Personally I can't be arsed with the "gifts from income" thing. There are other options.


Such as?

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Re: IHT and Normal expenditure

#128517

Postby Jabd2001 » March 28th, 2018, 10:15 am

I assume Lootman means living for 7 years. (Potentially exempt transfer). There's also AIM shares, and pension funds, which are IHT exempt.
I think really it depends what gifts you want to make and why - probably a bad idea to be driven completely by trying to avoid IHT.

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Re: IHT and Normal expenditure

#128531

Postby scrumpyjack » March 28th, 2018, 10:55 am

One follow up point.I note the point that 'income' is not necessarily the same as that for income tax purposes. Can one argue that ISA income, which is left in the ISA, is 'income' for the purposes of gifts out of income? Overall one is not depleting one's capital. With shares like Barratt and Persimmon in our ISAs, the ISA income is now substantial.

ps re posters comments on IHT planning, I have given the kids substantial amounts when they were infants and also more than 7 years ago, so they could buy mortgage free houses etc, it's just not sensible to give large amounts of capital at present because of their circumstances. They're not interested in it anyway.

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Re: IHT and Normal expenditure

#128532

Postby scrumpyjack » March 28th, 2018, 10:57 am

ps the same question arises on undrawn dividends in my drawdown pension?

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Re: IHT and Normal expenditure

#128560

Postby PinkDalek » March 28th, 2018, 12:45 pm

scrumpyjack wrote:One follow up point.I note the point that 'income' is not necessarily the same as that for income tax purposes. Can one argue that ISA income, which is left in the ISA, is 'income' for the purposes of gifts out of income? ...


ISA income may start off as income for these purposes but the HMRC guidance suggests that if the income is accumulated, perhaps by way of reinvestment, then it may be deemed to have become capital over several years or so.

ps the same question arises on undrawn dividends in my drawdown pension?


Perhaps as above and also is that income not yours, until drawn, as it effectively belongs to the trustees of the pension scheme?

PD

ps I hadn't realised you were not the OP (PaulBullet) whose question appears to have been lost over the course of the thread.

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Re: IHT and Normal expenditure

#128570

Postby PaulBullet » March 28th, 2018, 1:07 pm

Thanks PD

my original question was

This year he has had to put a new roof on his garage, the total costs was about 3-4,000, I would consider this not to be normal expenditure and as such I think he could use his savings to pay for this and then still gift the same amount to whomever he wishes. what are others views?

Paul


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