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Where Taxpayers and Advisers Meet

Payments out of income for IHT purposes

sigmund
Posts:87
Joined:Mon Nov 02, 2009 10:03 pm
Payments out of income for IHT purposes

Postby sigmund » Thu Sep 21, 2017 8:30 pm

How can I show (and prove) that payments I make to my children and grandchildren are made out of income and hence not liable to IHT? There do not appear to be any HMRC forms or any information as to what records have to be kept. I do not want my executors to have to argue the toss with HMRC after my demise.

AGoodman
Posts:1738
Joined:Fri May 16, 2014 3:47 pm

Re: Payments out of income for IHT purposes

Postby AGoodman » Fri Sep 22, 2017 10:29 am

Look at page 6 of IHT403. This is a table of the information executors need to submit to claim the relief. A particularly helpful testator will keep the info while alive and save their executors (or their solicitors) a lot of grief.

The other useful step can be to write to your family telling them that you plan to make them regular gifts of [ ]. This is particularly useful if you die after only one or two payments as it show intent to make more.

sigmund
Posts:87
Joined:Mon Nov 02, 2009 10:03 pm

Re: Payments out of income for IHT purposes

Postby sigmund » Fri Sep 22, 2017 3:12 pm

Thank you very much for the information. I do however want to know whether the payments have to be made on specific dates and be of the same amount. For example, could I gift surplus income to my two daughters at any time each year and for the amount to vary from year to year? Would it be acceptable for me to write to my daughters and say I have £32,000 income surplus to my requirements this year and I am therefore giving you £15,000 each (provided that I can show the sources of my income and my expenditure - though how on earth one can provide receipts for every item of household, food and travel I do not understand)

AGoodman
Posts:1738
Joined:Fri May 16, 2014 3:47 pm

Re: Payments out of income for IHT purposes

Postby AGoodman » Fri Sep 22, 2017 4:42 pm

No, there just needs to be some regularity of gifts - no need for it to be the same amount or same time of the year.

It is extremely unlikely that receipts would ever be sought (there is no expectation or obligation that the deceased should keep them). The answer is to leave a margin of error for smaller items so that the claim for relief cannot be contested.

maths
Posts:8507
Joined:Wed Aug 06, 2008 3:25 pm

Re: Payments out of income for IHT purposes

Postby maths » Fri Sep 22, 2017 8:12 pm

Agree with AG's comments.

Would add that "income" for this purpose is a reference to post tax income computed basically on normal accountancy principles. Note, the payments must be out of income and not capital.

sigmund
Posts:87
Joined:Mon Nov 02, 2009 10:03 pm

Re: Payments out of income for IHT purposes

Postby sigmund » Tue Sep 26, 2017 9:01 am

Thank you both for the information. It was very helpful as in the past I have been giving the money as PETs even though the money has come out of income and not capital. Is there any way that I should record the gifts to provide evidence of the gifts for my executors?

Tim63
Posts:4
Joined:Fri Nov 24, 2017 12:59 pm

Re: Payments out of income for IHT purposes

Postby Tim63 » Fri Nov 24, 2017 1:11 pm

Hope I'm not hijacking a thread here, but I'm new to this forum and need some help with precisely this subject.

My mother died recently and she and my father had been in the habit of giving away their surplus income in various ways. I'm reasonably confident that they had taken all the steps necessary to demonstrate that this was indeed habitual but on being confronted with completing IHT403 a question arises that we had never previously contemplated and that is how to determine surplus income, or rather it's allocation between my mother and my father. My father's record keeping is good and he has documentation supporting how he has arrived at surplus income and I had always just assumed that you'd take net income less total expenditure, divide by two and that was the amount that my mother could gift out of surplus income. However, when confronted with completing IHT403 there is a presumed expectation (I think) that my mother's net income would be essentially in line with what would have gone on her tax return (had she been required to complete one) plus any non-taxable income (ISAs etc) less tax payable. This is not the same as half my two parents' net income. So how does one allocate normal expenditure between the two spouses? Or should I be looking at gifts between my parents in order to bring their net incomes in line or amending the split of the gifts out of income so that the end result is the same but the amount gifted by mother and father is different?

This never even occurred to me before because my parents would never have regarded anything as belonging to one or other of them - everything was regarded as joint, regardless of whether legally (and fiscally) it was or not.

AGoodman
Posts:1738
Joined:Fri May 16, 2014 3:47 pm

Re: Payments out of income for IHT purposes

Postby AGoodman » Fri Nov 24, 2017 3:40 pm

There is no particular law or, so far as I am aware, guidance on this but I would suggest:

1. It is clear that income is income of the recipient - i.e. the only joint income is income from joint assets such as joint property and joint accounts. You cannot just attribute their total income equally between them.

2. Where one of them has paid an expense - i.e. from a sole account that should be treated as an outgoing of that person.

3. Where outgoings are paid from a joint account, they should be attributed half each.

Unless you are dealing with extremes, I would expect a reasonable treatment to be accepted.

Tim63
Posts:4
Joined:Fri Nov 24, 2017 12:59 pm

Re: Payments out of income for IHT purposes

Postby Tim63 » Fri Nov 24, 2017 6:15 pm

Thanks very much for the quick response AG.

Everything you say makes perfect sense but I'm not certain about the outcome! As you correctly say, there is very limited joint income and in practice my mother's income was substantially less than my father's - she was a non-tax payer. All their outgoings were paid for through a single joint bank account, so following your logic in many years my mother spent more than she earned ie her income was less than 50% of my parents' joint outgoings.

So in theory this would mean that she was unable to make very limited gifts out of surplus income. That would therefore imply that we should not be claiming gifts out of surplus income on behalf of my mother, but rather that the vast majority of such gifts were made by my father - do you agree?

TW1234
Posts:26
Joined:Sat Jan 07, 2017 11:42 am

Re: Payments out of income for IHT purposes

Postby TW1234 » Tue Nov 28, 2017 4:23 pm

But who actually made the gifts? Was the account used a sole account or the joint account?
Joint accounts can cause accounting difficulties!


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