IHT 403 gift annual exemption calculations

[hiriskpaul]

I understand that it is possible to carry forward an unused part of the £3000 annual exemption for 1 year only. Can someone confirm how this is done please?

For example if gifts are £1000 in the first year (7 years before death), £1000 in the second and £6000 in the third, I have £2000 unused in the first year. Can I then carry £1000 of this forward to offset the gifts in the second year and then carry £3000 from the second year to use in the third year? Or do I have to use up an annual allowance before bringing forward unused allowance from the previous year?

The IHT guidance is spartan in this area.

[Lootman]

I understand that it is possible to carry forward an unused part of the £3000 annual exemption for 1 year only. Can someone confirm how this is done please?

For example if gifts are £1000 in the first year (7 years before death), £1000 in the second and £6000 in the third, I have £2000 unused in the first year. Can I then carry £1000 of this forward to offset the gifts in the second year and then carry £3000 from the second year to use in the third year? Or do I have to use up an annual allowance before bringing forward unused allowance from the previous year?

My understanding of this is that the allowance is really £6,000 in the second year of any rolling 2-year period, assuming no gift in the prior year.

So in your example you could have gifted £5,000 in year two, but once you reached year three then that first year's unused allowance drops off. If you gifted a total of £7,000 in years 2 and 3 then that is £1,000 more than allowable under this rule, and so that £1,000 becomes instead only a potentially exempt gift, assuming you live for 7 more years.

For a while I simplified things by gifting £6,000 every other year.

[PinkDalek]

Or do I have to use up an annual allowance before bringing forward unused allowance from the previous year?

Correct.

The IHT guidance is spartan in this area.

Exempted gifts

You can give away £3,000 worth of gifts each tax year (6 April to 5 April) without them being added to the value of your estate. This is known as your ‘annual exemption’.

You can carry any unused annual exemption forward to the next year - but only for one year.

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

Other reliefs and exemptions outlined on that brief guidance page.

[hiriskpaul]

I understand that it is possible to carry forward an unused part of the £3000 annual exemption for 1 year only. Can someone confirm how this is done please?

For example if gifts are £1000 in the first year (7 years before death), £1000 in the second and £6000 in the third, I have £2000 unused in the first year. Can I then carry £1000 of this forward to offset the gifts in the second year and then carry £3000 from the second year to use in the third year? Or do I have to use up an annual allowance before bringing forward unused allowance from the previous year?

My understanding of this is that the allowance is really £6,000 in the second year of any rolling 2-year period, assuming no gift in the prior year.

So in your example you could have gifted £5,000 in year two, but once you reached year three then that first year's unused allowance drops off. If you gifted a total of £7,000 in years 2 and 3 then that is £1,000 more than allowable under this rule, and so that £1,000 becomes instead only a potentially exempt gift, assuming you live for 7 more years.

For a while I simplified things by gifting £6,000 every other year.

Interesting thanks, but unfortunately the gifts have already happened. I am an executor for a relative who died a few months ago, so I need to know the precise rules as the tax due depends on assumptions about how the exemptions can be used.

This whole process has been an eye opener on the importance of keeping proper records.

[hiriskpaul]

Or do I have to use up an annual allowance before bringing forward unused allowance from the previous year?

Correct.

Thanks, but why do you say this is correct? Nothing in the page you link to makes this clear. The statement "You can carry any unused annual exemption forward to the next year - but only for one year." is ambiguous. The 2 ways I have thought of applying the carry forward rule can produce different outcomes. And there may be other interpretations I have not thought of!

In my example I am carrying £2k forward as unused allowance, using £1k of it to match gifts in the second year and discarding the rest, then carrying the entire £3k from the second year forward to the third year. The alternative is to say £1k of the allowance gets used in year 2 leaving £2k to be carried forward to year 3.

[Lootman]

This whole process has been an eye opener on the importance of keeping proper records.

Yes, my accountant has always made a point of getting me to report all such gifts to him annually with my tax return info. It doesn't factor into the return (Gift-Aid aside) but is advised for precisely the reason you state - trying to figure out gifts over 7 or more prior years as an executor can be somewhere between difficult and impossible.

When my kids get to execute my estate, my accountant will have everything they need going back years.

[hiriskpaul]

This whole process has been an eye opener on the importance of keeping proper records.

Yes, my accountant has always made a point of getting me to report all such gifts to him annually with my tax return info. It doesn't factor into the return (Gift-Aid aside) but is advised for precisely the reason you state - trying to figure out gifts over 7 or more prior years as an executor can be somewhere between difficult and impossible.

When my kids get to execute my estate, my accountant will have everything they need going back years.

Gifts have been a bit of a nightmare. There have been other difficulties as well though. For example, I found that my uncle had 3 accounts jointly with his mother who died over 30 years ago. No up to date record anywhere as to what is in these accounts and when I reported my uncle's death, the bank's reverted the accounts to my uncle's mother and refused to tell me what was in them! I had to obtain a death certificate for my uncle's mother in order to have the accounts reinstated in my uncle's name.

[PinkDalek]

Or do I have to use up an annual allowance before bringing forward unused allowance from the previous year?

Correct.

Thanks, but why do you say this is correct? Nothing in the page you link to makes this clear. The statement "You can carry any unused annual exemption forward to the next year - but only for one year." is ambiguous. The 2 ways I have thought of applying the carry forward rule can produce different outcomes. And there may be other interpretations I have not thought of!

In my example I am carrying £2k forward as unused allowance, using £1k of it to match gifts in the second year and discarding the rest, then carrying the entire £3k from the second year forward to the third year. The alternative is to say £1k of the allowance gets used in year 2 leaving £2k to be carried forward to year 3.

I’m sorry I can’t explain better as I don’t find it ambiguous.

Perhaps some numbers but best to work backwards.

Year 3 £5,000 gifted
Less: £3,000
To cover £2,000 look at previous tax year ...

Year 2 £2,000 gifted
Less: £2,000
Can carry forward the £1,000 to year 3, leaving £1,000 in year 3 as a pet.

Year 1 £1,000 gifted
Less: £1,000
Could carry forward £2,000 to year 2 only but year 2’s exemption is used first. The excess £2,000 from year 1 is lost.

[supremetwo]

I know it is off-topic, but these allowances are unchanged for decades unlike most others and these small amounts are now causing tremendous difficulties and costs for executors.

A waste of time lobbying MPs at the moment but, as soon as Brexit (or not) is over, make a point to do some lobbying.

https://www.parliament.uk/get-involved/contact-your-mp/

[genou]

Or do I have to use up an annual allowance before bringing forward unused allowance from the previous year?

Correct.

Just to confirm that PD is correct. Have a look here - https://www.gov.uk/hmrc-internal-manual ... /ihtm14144

[PinkDalek]

Have a look here - https://www.gov.uk/hmrc-internal-manual ... /ihtm14144

I looked for that briefly last night without success. My excuse is the heat.

I can now see why hiriskpaul felt the wording in the basic guide was ambiguous but those dumbed down basic guides have been lambasted so many times in the past, I probably relied on knowledge as against bothering to read it!

I still stand by my original 'Correct' to the sentence quoted but fully accept that the extract I then quoted wasn't sufficiently well worded.

[hiriskpaul]

Thanks for the clarification PD/genou. I really think the notes coming with the IHT400/403 forms should be made more explicit. People filling in the forms should not have to go searching through the tax manual for fairly basic information.

Another area of uncertainty is how to partition gifts into years. I have assumed this is by tax year, so in my relative's case, who died on 10th February, I need to consider gifts in tax years ending 2012 to 2019 and for 2012 I do not need to consider gifts before 10/02/12. Is this correct?

[genou]

Another area of uncertainty is how to partition gifts into years. I have assumed this is by tax year, so in my relative's case, who died on 10th February, I need to consider gifts in tax years ending 2012 to 2019 and for 2012 I do not need to consider gifts before 10/02/12. Is this correct?

Correct!

[Charlottesquare]

Thanks for the clarification PD/genou. I really think the notes coming with the IHT400/403 forms should be made more explicit. People filling in the forms should not have to go searching through the tax manual for fairly basic information.

Another area of uncertainty is how to partition gifts into years. I have assumed this is by tax year, so in my relative's case, who died on 10th February, I need to consider gifts in tax years ending 2012 to 2019 and for 2012 I do not need to consider gifts before 10/02/12. Is this correct?

Just to complicate, if these were regular gifts could they be considered gifts out of income?

https://www.thisismoney.co.uk/money/pen ... ncome.html

[hiriskpaul]

Thanks for the clarification PD/genou. I really think the notes coming with the IHT400/403 forms should be made more explicit. People filling in the forms should not have to go searching through the tax manual for fairly basic information.

Another area of uncertainty is how to partition gifts into years. I have assumed this is by tax year, so in my relative's case, who died on 10th February, I need to consider gifts in tax years ending 2012 to 2019 and for 2012 I do not need to consider gifts before 10/02/12. Is this correct?

Just to complicate, if these were regular gifts could they be considered gifts out of income?

https://www.thisismoney.co.uk/money/pen ... ncome.html

Yes, I have already identified those. All quite small though compared with large gifts 4 to 5 years ago.