Potentially Exempt Transfers

[Lootman]

Suppose I take you out for dinner and pay for us. Seems to me that would successfully reduce my estate by the amount of the meal. It's an act of generosity but not technically a gift. Who is to say that your company isn't worth the cost of a meal (I feel sure that it is).

I suspect that technically it is (including for IHT purposes) a gift. But we sort it all out because I return the compliment in due course because I value your company. And HMRC care not a jot. But start taking famille Lootman on 20K cruises and their ears will prick up.

It's a self assessment system - there is an expectation of sense all round. Dinner on Gran is likely a nothing for tax. Hiring the Fat Duck for the extended family, or paying for grand-daughter's 400 guest wedding should show up on the forms. Where you draw the line is up to you. Where the line should have been drawn if HMRC question the submitted forms is a question that can prove to be protracted and expensive.

The usual definition of "gift" for tax purposes is "a transfer of property by one individual to another while receiving nothing, or less than full value, in return". So for HMRC to challenge that such an act of generosity was a gift it would seem that they have to argue that buying you dinner is a "transfer" and one of two other things. Either:

1) The consideration that I receive in exchange for my generosity does not reasonably amount to the value of the generosity, or
2) The nature and pattern of such generosity is not natural or reasonable, and is seen primarily as a device to reduce tax.

So whether that 20K cruise falls foul would appear to depend either on the value to me of my fellow cruisers and/or my motive for doing so. The person those questions would be directed to is dead, since such incidents are not tax events until and unless uncovered during probate. A lot of small acts of generosity is probably safer than a small number of excessive acts. I'd agree it probably comes down to the amount and the extent of the generosity. If someone manages to fritter away millions that might attract scrutiny. On the other hand if the millions have gone, there is probably nobody who can pay any alleged IHT anyway.

What on earth difference does it make whether one gives out of income or capital, so long as one does not leave oneself with so little that one becomes entitled to benefits?

It doesn't make any sense but that is the way the rule is written. Part of why it doesn't make much sense is that income can be converted to capital and capital can be converted to income.

So as an example, you could buy an income share of a split-capital investment trust. This would have the effect of ensuring a capital loss over the life of the security - they typically amortise down to zero. But you receive a high income.

So a million used to buy such an income share might yield 200K a year in income for 6 years, all of which could be given away if surplus to income. It's just annoying that arbitrary rules can induce people to engage in such convoluted mechanisms.

[Lootman]

What happens if you pay for your daughter's wedding, which used to be the norm, and then croak? It never occurred to me that we or more likely (in the absence of any codicil) she could get stung for IHT on that if either or both of us copped it in a car crash soon after coughing up over £16k for our daughter's wedding about 17 years ago, on top of giving her the £5k (also unchanged) one is allowed to give free of tax on such occasions. So far as we were concerned, being old school, that WAS nor was normal expenditure, though things seemed to have changed when our son got married a few years later.

Indeed, or by extension all of the generosity I have extended to my children over the last 7 years could be taxable at 40%, if genou's theory is valid. Every meal, hotel room, airfare etc., given in good faith as a "normal" family gesture could later come back to haunt them?

I expect my monetary gifts to them, say to buy a house, need seven years to become exempt. But it never crosses my mind that someone might claim that normal incidences of inter-family generosity could be so assessed.

And it would make an Executor's job orders of magnitude more difficult, and probably impossible. In that case, many Executors would refuse to act for fear of being held personally responsible for things they cannot know about, and the entire probate system would then collapse because it relies on executors.

So in practice it doesn't seem to work that way, and such generosity is disregarded in assessing gifts.

[Bouleversee]

And what about more basic things, Lootman? E.g. if your sprog's washing machine expires and she can't afford to buy a new one, never mind going on a cruise, or there isn't enough in her kitty to pay the credit card bill for the groceries this month, so you pay those bills direct? Or there are school fees to be paid? All these things could be paid direct and I daresay it frequently happens but they are no different really from a cash gift or some shares. Surely HMRC must be wise to all that. Anyway, since I am simply not prepared to have to keep accounts of all my expenditure on top of my income, there is no way I am going down the surplus income route and I'd like to sleep at night. I have given away some shares as PETs and left a list with my will and that will have to do. The fact that it would appear fairly easy to get round the rules only underlines how stupid they are.

Split capital trusts are too complicated for me. Were they invented for the purpose of avoiding IHT? I wonder what the total return amounts to and whether one might do better with a different investment and paying the tax. No wonder people are saying I should get some financial advice. However, I must now go and spray the drive and patio which I can't do on a sunny day as it evaporates too quickly. How the rich live!

[genou]

What happens if you pay for your daughter's wedding, which used to be the norm, and then croak? It never occurred to me that we or more likely (in the absence of any codicil) she could get stung for IHT on that if either or both of us copped it in a car crash soon after coughing up over £16k for our daughter's wedding about 17 years ago, on top of giving her the £5k (also unchanged) one is allowed to give free of tax on such occasions. So far as we were concerned, being old school, that WAS normal expenditure, though things seemed to have changed when our son got married a few years later.

I feel your confusion. Times change. I would have regarded my daughters' wedding as my cost, but I suspect they will have none of that. I have no idea whether this issue has been addressed by HMRC. Spend / donate your money as seems right to you and fill in the forms accordingly. But don't get hung up on IHT - you won't pay it, and your children will not miss what they have never had.

[Gengulphus]

At least when it comes to gifts, however, there are other ways to handle them. It's only a technically a gift is you receive nothing in return for it. Structure gifts in a way that you do derive a benefit and it's no longer defined as a gift at all.

As an example, If I give you 10K for you to take a world cruise, that's a gift. But if I pay 20K for a world cruise for both of us, then it's not a gift because I receive something in return - your company on the trip.

I wouldn't be so gung-ho about this approach.

The act charges a disposition made by a person (the transferor) as a result of which the value of his estate immediately after the disposition is less than it would be but for the disposition and the disposition is gratuitous. Buying a cruise is caught; the idea that company makes it not so seems odd. Unless it is salary, as in paid companion, which is a different can of worms.

I don't know. Suppose I take you out for dinner and pay for us. Seems to me that would successfully reduce my estate by the amount of the meal. It's an act of generosity but not technically a gift. Who is to say that your company isn't worth the cost of a meal (I feel sure that it is).

What about 100 dinners?

Technically, a dinner is a gift, just as the cruise is. However, the taxman only expects the executor to honestly exercise 'due diligence' - to make reasonable enquiries to look for evidence of gifts and if he or she sees evidence of them, to dig into that evidence to see whether it indicates a gift. He does know that the executor cannot hope to be aware of every small (or even medium-sized, if it's an expensive dinner!) gift the deceased has made - and since he knows that the executor can only be penalised for deliberately lying or turning a blind eye, he's pretty unlikely to pursue a matter of gift dinners. Furthermore, he does know that many dinners that are technically gifts will either fall under the small gifts exemption (if one-offs) or the "regular gifts out of income" exemption (if there are 100 of them!)...

But an executor who sees £20k spent on a cruise in the last 7 years before death and doesn't at least enquire into the question of whether there might be a gift involved, or who doesn't even look to see whether large sums disappeared from the deceased's estate for reasons that might be gifts, is not exercising 'due diligence'. As a result, they're at least risking the taxman's enquiries...

Or in short, the approach I would take on such matters is not to indulge in a proverbial-extracting competition with the taxman for significant stakes - because if you get him interested, he's better at it than you are!

Or regarding that cruise, maybe I am going to take it anyway but don't want to be on my own. I decide to take you along as well so I'm not lonely. Who is going to put a value on that? Or call it "gratuitous?

Accountants! The 'loss of value to the estate' test is not a 'loss of value to the owner of the estate' test: you may feel that you've had entirely adequate lack-of-loneliness compensation for the money spent and so suffered no loss, but the accountant's view is that £20k has vanished from the value of the estate and the financially-quantifiable benefit to you is only £10k - so there's a net "gratuitous" loss of £10k.

And as a practical matter, is an Executor really going to go through seven years worth of credit card statements and then investigate each line item to see if someone else benefited? I just can't see anyone doing that. Typically they might look at bank statements to look for large cash sums that might be gifts. But asking for seven years of credit card statements from the issuer of each card, even assuming that you could track them down? It would be a colossal undertaking.

Executors will obviously vary about just how much they do, and how much work it is will depend on how good a record-keeper the deceased was. In the relevant case for me, the deceased was a very good record-keeper, indeed some would say excessively good - essentially complete records of one bank account back to when it was opened in 1949, for instance! Unfortunately, not quite as good at keeping the records in order, and the situation wasn't helped by some over-enthusiastic attempts on my part to clear out the house :-(. The colossal undertaking was sorting the records out to get them down to a manageable volume without carelessly chucking away stuff I really ought to have kept; going through them at the end looking for evidence of gifts was a few hours of work, fairly minor in comparison. As you say, it was mainly looking through bank statements looking for large sums that might be gifts, though I also kept an eye open for other indications, such as any mention of names of family members or of personal-looking messages in the bank statement's explanation of the entry.

I did also look through cheque book stubs - and was very glad that several years before, I'd asked the deceased to briefly note the reason for any cheque paid to family members on the stub: that allowed me to very quickly sort out whether cheques were gifts (typically for birthday or Christmas) or non-gifts (typically repaying the family member for something bought for the deceased). They hadn't quite remembered to do so on every occasion, but it meant I only had to look into a handful of unclear cases rather than dozens of them...

Was what I did overkill for the situation? Quite possibly - but it's a situation where I much prefer the penalty for overkill (a few hours of extra work) to that for underkill (potentially facing some very awkward questions from the taxman).

And the moral that I draw from it all? Basically, that if one is going to try to conceal large gifts from the taxman for IHT purposes, do so in a way that conceals them from one's executor as well - and assume that one's executor is going to make reasonable efforts to look for them! You're beyond the reach of the taxman by the time it matters whether it's detected, but your executor isn't - and it simply isn't fair to them to present them with evidence that you've made gifts and expect them to assist with concealing it. And that applies regardless of whether it's immediately-available evidence or evidence that will become available if the executor makes reasonably-obvious enquiries.

Gengulphus

[melonfool]

If anyone wants to reduce their IHT bill by buying someone expensive dinners I am available to assist with that......

Mel

[Gengulphus]

If I may ask a related question, as I'm currently compiling my own version (not in their precise format) of the HMRC table on page 6 of IHT403 entitled "Gifts made as part of normal expenditure out of income" :

https://www.gov.uk/government/uploads/s ... IHT403.pdf

This being the table we've discussed many a time in the past (and often causes surprise to those who've never seen it).

To be honest, I don't remember any such discussion! Could be that my "packrat memory" happens not to have selected those particular discussions to memorise; could be that you mean "we" more generally as "other Fools and me" rather than "you and me"... Not that it matters a great deal - I just want to make it clear that it's a new question to me.

I am ignoring capital expenditure, such as replacement motor vehicles. I may have misunderstood your mention of a replacement car and should appreciate it if you could expand further. I can understand that such expenditure might reduce one's ability to make the regular gifts, in a particular year, but I'm not convinced such expenditure should come within the expenditure headings in the table.

My immediate thought is that you could be right - but as I said, I would err on the conservative side on such issues. If having a car to use were part of my normal standard of living, I would count the cost of ensuring I have one to use as expenditure needed to maintain that standard, and that includes both the regular costs such as fuel and servicing, and the more sporadic ones such as replacing the car when necessary. Essentially, my attitude is that my executor is doing me a big enough favour simply by administering my estate - expecting them to get involved in technicalities about whether particular items of expenditure are income or capital in nature goes beyond what I should reasonably expect of them!

An alternative approach might be to take professional tax advice about the issue and make certain that that advice is available to my executor.

Gengulphus

[Gengulphus]

I still think the whole concept is nonsense. What is so special about 7 years and why should regular gifts (more likely to be from the very rich) be any more acceptable than one gift made out of accumulated savings to a family member who suddenly needs money, say for surgery or a deposit on a house? ...

Not certain exactly what you mean you mean by "the whole concept".

If you mean the whole concept of Inheritance Tax, as I said that's not a debate I'm going to get into.

If you accept the concept of Inheritance Tax but mean the whole concept of gifts being "timed out" for Inheritance Tax purposes, it's quite clear that Inheritance Tax will be trivially avoidable if it doesn't take gifts into account or it times them out very quickly, and will be ridiculously unworkable if it takes them into account forever or only times them out very slowly. So they have to be timed out on some sort of intermediate timescale - long enough to make 'deathbed' and 'suffering from terminal illness' gifts very largely ineffective at avoiding the tax, not so long that executors are presented with a completely obviously unreasonable task. There's nothing magical about 7 years, but 7 months would be pretty obviously too short and 7 decades pretty obviously too long, so it is very roughly in the right ballpark...

For what it's worth, my personal opinion is that it errs on the 'too long' side - 3-5 years would probably be long enough to counteract the vast majority of 'deathbed' and 'suffering from terminal illness' gifts as an avoidance device, and would significantly reduce the burden on executors. But that is just opinion...

Gengulphus

[Bouleversee]

Gengulphus said:

"Technically, a dinner is a gift, just as the cruise is. However, the taxman only expects the executor to honestly exercise 'due diligence' - to make reasonable enquiries to look for evidence of gifts and if he or she sees evidence of them, to dig into that evidence to see whether it indicates a gift. He does know that the executor cannot hope to be aware of every small (or even medium-sized, if it's an expensive dinner!) gift the deceased has made - and since he knows that the executor can only be penalised for deliberately lying or turning a blind eye, he's pretty unlikely to pursue a matter of gift dinners. Furthermore, he does know that many dinners that are technically gifts will either fall under the small gifts exemption (if one-offs) or the "regular gifts "

But in most cases the executors will be the ones who received the gifts so they won't need to look for chequebook stubs. They will merely have to decide whether to take a chance on not mentioning these gifts or not. I know of one case where a son had his mother's will varied so that the family home, which happens to be in a nice coastal resort, went to his childen rather than him. However, he continues to stay there fairly frequently and he is the one who is footing all the bills re the house including quite a lot of modernisation, new kitchen, windows, etc.etc. Do you think his children will be declaring those costs as gifts to them, which they clearly are, or the benefit he has retained from something he effectively gave away by varying the will, so a gift with reservation? I wouldn't put money on it, would you?

As regards "the whole concept" I was talking about PETs and the rules governing when IHT is payable rather than whether IHT should ever be paid. One could argue that capital transfer tax, which we used to have, is fairer because it is less of a lottery and less easy to avoid but one could also argue that if they raised the IHT threshold people would not feel the need to be so devious in looking for ways to avoid it. I can't myself see why it's any worse to give away money on one's deathbed, when one knows one is no longer going to need it, than 7 years earlier when one might well need it in the future but I should have thought it would be very difficult to conceal the former from the taxman and avoid tax unless of course it was done via a spouse, which is of course perfectly legitimate if the spouse lives 7 years. However, as you say, it's all a matter of opinion and we are going round in circles.

[PinkDalek]

... I know of one case where a son had his mother's will varied so that the family home, which happens to be in a nice coastal resort, went to his childen rather than him. However, he continues to stay there fairly frequently and he is the one who is footing all the bills re the house including quite a lot of modernisation, new kitchen, windows, etc.etc. Do you think his children will be declaring those costs as gifts to them, which they clearly are, or the benefit he has retained from something he effectively gave away by varying the will, so a gift with reservation? I wouldn't put money on it, would you? ...

A validly executed deed of variation would mean there can be no Gift with Reservation. He made no gift.

As for the expenditure, perhaps it falls under the matter previously under discussion or they'll be successful PETs.

Alternatively, perhaps they treat the expenditure as rent for his use of the property and pay Income Tax on it.

Perhaps they should ask about it on a board entitled Taxes and dedicated to Practical Issues.

In the meantime ...

[PinkDalek]

Thanks for your reply. I'll not repeat all you said for brevity, this Topic already covering 4 pages, but thank you also for the part I haven't repeated.

If I may ask a related question, as I'm currently compiling my own version (not in their precise format) of the HMRC table on page 6 of IHT403 entitled "Gifts made as part of normal expenditure out of income" :

https://www.gov.uk/government/uploads/s ... IHT403.pdf

This being the table we've discussed many a time in the past (and often causes surprise to those who've never seen it).

To be honest, I don't remember any such discussion! Could be that my "packrat memory" happens not to have selected those particular discussions to memorise; could be that you mean "we" more generally as "other Fools and me" rather than "you and me"... Not that it matters a great deal - I just want to make it clear that it's a new question to me.

Yes, sorry, I did mean we in the general sense of Fools, here and there.

However, on the car purchase/capital expenditure front, I thought I'd look back at TMF. Somehow or other, I found this post by meldrewlives from 2010:

http://boards.fool.co.uk/well-i-had-a-c ... 45987.aspx

It covers a conversation with the CTO and it includes:

On the expenditure side I did manage to clarify that 'one-off' non-recurring expenditure out of capital, e.g. buying a car one year, could be excluded. It was however pointed out that if one was in the habit of buying a new car every year then this becomes "normal expenditure" and should be included.

That's sufficient for my purposes, being LTB&H in so far as cars are concerned, and I will fully annotate my schedules, which are being prepared for my Executors, along those lines. They'll be using professional advice at the time, I'm sure, and should they decide that my IHT403 table is not worth a candle, that would be up to them. Having been an Executor using professional advice fairly recently, I was able to tell the solicitors, who asked the question, that I was aware of the question shown below and the IHT403 table and that it was not in point for the estate in question.

In any event, at the moment, I'm not at all convinced I can demonstrate a sufficiency of surplus income for these purposes (I'm also listing all appropriate gifts (within reason)) and will make it easier for them by telling them so.

At least my efforts will save my Executors from attempting or being tempted to recreate the position and they'll be able to see fairly clearly that the answer to the question on IHT403 of Are you claiming that gifts should be treated as exempt as 'gifts out of income'? would be a no (at least for the moment).

PD

PS The whole thread is presently here http://boards.fool.co.uk/iht-gifts-out- ... sort=whole and, having found it, I've saved it here https://web.archive.org/web/20170412014 ... sort=whole. I've yet to study it fully, it includes some interesting comments on SIPPs, but I saw a Gordon Bennett! from someone when I mentioned the detail required for the IHT403 table.

[Gengulphus]

Gengulphus said:

"Technically, a dinner is a gift, just as the cruise is. However, the taxman only expects the executor to honestly exercise 'due diligence' - to make reasonable enquiries to look for evidence of gifts and if he or she sees evidence of them, to dig into that evidence to see whether it indicates a gift. He does know that the executor cannot hope to be aware of every small (or even medium-sized, if it's an expensive dinner!) gift the deceased has made - and since he knows that the executor can only be penalised for deliberately lying or turning a blind eye, he's pretty unlikely to pursue a matter of gift dinners. Furthermore, he does know that many dinners that are technically gifts will either fall under the small gifts exemption (if one-offs) or the "regular gifts "

But in most cases the executors will be the ones who received the gifts so they won't need to look for chequebook stubs. ...

You really expect them to remember every small act of generosity for the last seven years of their own accord?

The taxman won't expect that - but he will expect them to remember and declare major acts of generosity like that cruise.

... They will merely have to decide whether to take a chance on not mentioning these gifts or not. I know of one case where a son had his mother's will varied so that the family home, which happens to be in a nice coastal resort, went to his childen rather than him. However, he continues to stay there fairly frequently and he is the one who is footing all the bills re the house including quite a lot of modernisation, new kitchen, windows, etc.etc. Do you think his children will be declaring those costs as gifts to them, which they clearly are, or the benefit he has retained from something he effectively gave away by varying the will, so a gift with reservation? I wouldn't put money on it, would you?

Of course I wouldn't - I don't know the people concerned, and I'm nowhere near naïve enough to think that nobody ever commits tax evasion, nor that those who do commit it always get caught.

But do you think that if they don't declare those costs as gifts and the taxman finds out, they'll get off scot-free? I wouldn't put money on that either, would you?

By the way, assuming you mean he executed a correctly-drafted Deed of Variation in favour of his children within the time limit, I'm pretty certain that there is no gift-with-reservation issue. That's because a Deed of Variation doesn't actually vary the will: it varies the tax treatment by IHT and CGT to be as though the will had left the bequest to its new recipients rather than its original recipients. So as far as IHT and CGT are concerned, he quite simply didn't make a gift - and so for IHT, the question of whether it was with or without reservation simply doesn't arise.

As regards "the whole concept" I was talking about PETs and the rules governing when IHT is payable rather than whether IHT should ever be paid. One could argue that capital transfer tax, which we used to have, is fairer because it is less of a lottery and less easy to avoid but one could also argue that if they raised the IHT threshold people would not feel the need to be so devious in looking for ways to avoid it. I can't myself see why it's any worse to give away money on one's deathbed, when one knows one is no longer going to need it, than 7 years earlier when one might well need it in the future ...

As I indicated, I think it's a matter of designing IHT to be a practical tax, which involves striking a balance between making it too easy to avoid by making gifts soon before death, and making it too burdensome on executors by requiring them to look too far back. Not one of whether one set of actions is inherently 'worse' than another.

I can only speculate about the motivations behind the transformation of Capital Transfer Tax into Inheritance Tax in the Finance Act 1986, as it pre-dates any interest I took in such matters by over 10 years. But the major change seems to have been the introduction of PETs and their 7-year cut-off, and the most obvious speculation to my mind is that the lack of any such cut-off was indeed proving too burdensome.

Gengulphus

[Dod1010]

If anyone wants to reduce their IHT bill by buying someone expensive dinners I am available to assist with that......

Mel

Sadly I have a family which is quite capable of helping in this area, so, as much as I would love to meet Mel, I am afraid I'll need to pass.

I am sure that all of this discussion has long since departed into the realms of theory because most acts of generosity/entertaining of family (or even Mel) would fall into the category of 'normal expenditure' I expect. It would mostly be fairly easy to identify anything which did not.

Dod

[Bouleversee]

Gengulphus wrote:

"By the way, assuming you mean he executed a correctly-drafted Deed of Variation in favour of his children within the time limit, I'm pretty certain that there is no gift-with-reservation issue. That's because a Deed of Variation doesn't actually vary the will: it varies the tax treatment by IHT and CGT to be as though the will had left the bequest to its new recipients rather than its original recipients. So as far as IHT and CGT are concerned, he quite simply didn't make a gift - and so for IHT, the question of whether it was with or without reservation simply doesn't arise".

I shouldn't post so late at night when my brain is tired having been up with the larks. You are, of course, quite right.

As regards the house expenditure, these were major items but my guess is that it wouldn't even occur to the heirs/executors to mention them or they would deliberately choose not to and that the taxman will never find out whereas my share disposals, if not declared, probably would be, certainly not a risk worth taking.

[Gengulphus]

However, on the car purchase/capital expenditure front, I thought I'd look back at TMF. Somehow or other, I found this post by meldrewlives from 2010:

http://boards.fool.co.uk/well-i-had-a-c ... 45987.aspx

It covers a conversation with the CTO and it includes:

On the expenditure side I did manage to clarify that 'one-off' non-recurring expenditure out of capital, e.g. buying a car one year, could be excluded. It was however pointed out that if one was in the habit of buying a new car every year then this becomes "normal expenditure" and should be included.

Thanks - an interesting post, though there are obviously many possibilities between 'one-off' and 'every year', and so some sort of infrequency cut-off is needed, above which the expenditure is infrequent enough to count as out of capital. Just where that cut-off should be is a difficult question.

But I would certainly be very uncomfortable making it as low as 'every two years', in light of what https://www.gov.uk/hmrc-internal-manual ... /ihtm14250 says about "Fluctuating income" (with my bold):

"The intention in including ‘taking one year with another’ in IHTA 1984/S21(1)(b) is to provide for the case where a person’s income fluctuates from year to year but overall they have enough income to make normal gifts and meet their standard of living on an ongoing basis. In these cases, you may need to look at the income and expenditure over a number of years to see if the income test is satisfied. Although income can be carried over from year to year in these circumstances, you should refer to Technical if the taxpayer wishes to carry forward more than two year’s income."

And https://www.gov.uk/hmrc-internal-manual ... /ihtm14255 says some similar stuff about considering income and expenditure together, with "taking one year with another" taken into account.

That first link also says:

"If there is no evidence to the contrary, we consider that income becomes capital after a period of two years. Evidence to the contrary could impact either way as income:
•may immediately be invested in a capital product and become capital or
•may be retained as income for more than two years with a specific purpose in mind."

If someone made a habit of buying a car every five years, for instance, saving up a fifth of the cost each year so as to be able to afford it, there would be a viable argument that it had been retained as income because of that second bullet, and therefore the expenditure was both "normal" (because it's habitual) and "out of income". Not saying that would necessarily be the winning argument, though - just that it's viable.

But my main point is really that the closer the executor strays to the borderline, the more likely it is that they'll face an uphill struggle convincing the taxman - which will be a burden on them even if they ultimately succeed. So I would try primarily to give them an easy case that doesn't stray near the borderline to make - given what you've dug up, I think pochisoldi's comment in the thread you found that:

"I would argue that buying a car every N years is normal expenditure, provided N is reasonably small.
(every 5 years would cut it, every 15 wouldn't)."

is a reasonably easy case. I might also give them a harder case to make (because of including less in the income figures) if they fancied their chances - but my priority would be the easy case.

In any event, at the moment, I'm not at all convinced I can demonstrate a sufficiency of surplus income for these purposes (I'm also listing all appropriate gifts (within reason)) and will make it easier for them by telling them so.

At least my efforts will save my Executors from attempting or being tempted to recreate the position and they'll be able to see fairly clearly that the answer to the question on IHT403 of Are you claiming that gifts should be treated as exempt as 'gifts out of income'? would be a no (at least for the moment).

Actually I think that if I were in that position, I would pre-empt the answer by using one-off PETs for anything in excess of other, clearer exemptions, rather than anything that could be construed as regular gifts. If I did the latter, executors might feel a duty to the beneficiaries to check up on my income & expenditure position; doing the former, I can tell them that the answer is a clear "no" regardless of that position, so no point whatsoever doing the work to check up on it.

PS The whole thread is presently here http://boards.fool.co.uk/iht-gifts-out- ... sort=whole and, having found it, I've saved it here https://web.archive.org/web/20170412014 ... sort=whole. I've yet to study it fully, it includes some interesting comments on SIPPs, but I saw a Gordon Bennett! from someone when I mentioned the detail required for the IHT403 table.

Well, it seems I did contribute to that thread, so my memory may well be at fault. Only "may well", though, because I do sort-of-recognise what I wrote then, but don't see any evidence that I actually looked at the detailed requirements of IHT403...

About those detailed requirements, I think I would have quite a significant "Other" category in the expenditure, quite possibly enough to require an accompanying explanation that I know the amount of cash I spend - that's reasonably easy to obtain from the cash machine withdrawals in my bank statements - but cannot give a breakdown between various things I spend it on, such as food ("Household bills", I think), bus fares ("Travelling costs") and books ("Entertainment" or possibly genuinely "Other")...

Gengulphus

[Gengulphus]

... I might also give them a harder case to make (because of including less in the income figures) if they fancied their chances - but my priority would be the easy case.

Have spotted that I managed to type "income figures" in that when I meant "expenditure figures" - sorry if that 'thinko' has caused any confusion about what I meant.

Gengulphus

[Bouleversee]

Gengulphus said:

"About those detailed requirements, I think I would have quite a significant "Other" category in the expenditure, quite possibly enough to require an accompanying explanation that I know the amount of cash I spend - that's reasonably easy to obtain from the cash machine withdrawals in my bank statements - but cannot give a breakdown between various things I spend it on, such as food ("Household bills", I think), bus fares ("Travelling costs") and books ("Entertainment" or possibly genuinely "Other")..."

Precisely. Nor could I and I think it is unreasonable to expect (often elderly) people to spend time doing all that. What does it matter precisely what one spends one's income on? And these things change anyway. I haven't bought much in the way of clothes for years but when Lootman invites me to join him on that cruise I shall be flashing my credit card like nobody's business and after reading all this (not PD's link which I can't face as yet) my drinks bill is likely to go up as well though my food bill is going down (baked beans at 10 pm because reading it has left no time for cooking.) All nonsense. Time we had some sensible tax laws.

[Lootman]

Executors will obviously vary about just how much they do, and how much work it is will depend on how good a record-keeper the deceased was. In the relevant case for me, the deceased was a very good record-keeper, indeed some would say excessively good - essentially complete records of one bank account back to when it was opened in 1949, for instance! Unfortunately, not quite as good at keeping the records in order, and the situation wasn't helped by some over-enthusiastic attempts on my part to clear out the house :-(. The colossal undertaking was sorting the records out to get them down to a manageable volume without carelessly chucking away stuff I really ought to have kept; going through them at the end looking for evidence of gifts was a few hours of work, fairly minor in comparison. As you say, it was mainly looking through bank statements looking for large sums that might be gifts, though I also kept an eye open for other indications, such as any mention of names of family members or of personal-looking messages in the bank statement's explanation of the entry.

I think that for someone who was very old, such an approach would be adequate. For instance my father never had or used credit cards. It was all cash or cheques. So a complete picture of his financial activity was quite easy to discern because it all consisted of documented cheques and cash withdrawals.

But many people today pay for everything on cards, and a variety of them too - I have at least a dozen. Looking at my bank statements will merely show large payments going to pay off cards. If you really want to delve into the detail, you'd need to look at all those card statements, which probably also means obtaining them in the first place, including ones I may have cancelled a few years ago and discarded the information. Throw in PayPal and other electronic payment systems and the job could rapidly become very time-consuming IF an executor is determined to look everywhere for possible gifts. I doubt that many do.

And the moral that I draw from it all? Basically, that if one is going to try to conceal large gifts from the taxman for IHT purposes, do so in a way that conceals them from one's executor as well - and assume that one's executor is going to make reasonable efforts to look for them! You're beyond the reach of the taxman by the time it matters whether it's detected, but your executor isn't - and it simply isn't fair to them to present them with evidence that you've made gifts and expect them to assist with concealing it. And that applies regardless of whether it's immediately-available evidence or evidence that will become available if the executor makes reasonably-obvious enquiries.

Yes, that's a special case of the general rule that if you're going to lie about something then don't tell anyone, especially an accountant or lawyer. Best to keep them in the dark too because otherwise you place them in a difficult situation.

Of course, in many cases the executor is also the beneficiary of the estate. In my case I will guide my executors by simply documenting what I think is relevant and not documenting what I deem to be irrelevant. So cash and transfers of valuable assets will be annotated - meals and other acts of normal generosity will not. If that 20K cruise happens I will probably include it and they can decide how to handle it. My executors are also my beneficiaries - they are paying any tax due so they can make such decisions and risk assessments.

[Gengulphus]

I think that for someone who was very old, such an approach would be adequate. For instance my father never had or used credit cards. It was all cash or cheques. So a complete picture of his financial activity was quite easy to discern because it all consisted of documented cheques and cash withdrawals.

Sorry, but you're way off-target if you think the case I was talking about was anything like that simple. It involved multiple bank accounts and credit cards in three different countries, with quite a lot of transfers between them...

But many people today pay for everything on cards, and a variety of them too - I have at least a dozen. Looking at my bank statements will merely show large payments going to pay off cards. If you really want to delve into the detail, you'd need to look at all those card statements, which probably also means obtaining them in the first place, including ones I may have cancelled a few years ago and discarded the information. Throw in PayPal and other electronic payment systems and the job could rapidly become very time-consuming IF an executor is determined to look everywhere for possible gifts. I doubt that many do.

So do I - and I wasn't that determined either! As I said, I went (perhaps "skimmed" would be a better word) through the statements keeping an eye open for signs of gifts - primarily large unexplained sums, but also recognisable names, payment references that looked like personal messages, etc. And I spotted a few - all of which turned out on investigation either to be gifts inside the small gifts exemption or the £3k annual allowance, or to have non-gift explanations such as someone having purchased a laptop for the deceased and been reimbursed for its cost.

But there's no way that my checks were really comprehensive - my aim as an executor is to be able to honestly say that I've made a reasonable effort to identify gifts, not to do an exhaustive forensic analysis for them! I reckon that I had a good chance of spotting gifts I hadn't been told about by oversight - but I've little doubt that had the deceased been determined to conceal gifts from me, a bit of ingenuity in going about it could have given them a very good chance of success...

Gengulphus

[Gengulphus]

Gengulphus said:

"About those detailed requirements, I think I would have quite a significant "Other" category in the expenditure, quite possibly enough to require an accompanying explanation that I know the amount of cash I spend - that's reasonably easy to obtain from the cash machine withdrawals in my bank statements - but cannot give a breakdown between various things I spend it on, such as food ("Household bills", I think), bus fares ("Travelling costs") and books ("Entertainment" or possibly genuinely "Other")..."

Precisely. Nor could I and I think it is unreasonable to expect (often elderly) people to spend time doing all that. ...

For what it's worth, I rather doubt that they do expect anybody to spend much time on the detailed breakdown in IHT403. It doesn't give me the impression of actually being interested in the precise breakdown of the normal expenditure - I'd expect a better definition of the boundaries between them if that was wanted. Instead, it gives me the impression of a rather clumsy attempt to be helpful, essentially by providing a checklist of the main categories of normal expenditure one should look out for...

Gengulphus