Gifts from surplus income -- what qualifies as income?

[Tenareze]

Good morning,

My wife and I have been making gifts to our grandchildren out of surplus income for a couple of years now. We each have sufficient income to cover our 50% share of the gifts.

To help our executors, I'm keeping detailed records, in IHT403 format, of income and expenditure. However, I'm not entirely sure what qualifies as "income". So far, I've included the following:

Pensions
Interest from bank deposits
Share dividends
ISA income distributions
ISA interest distributions
Winter Fuel Allowance
Christmas Bonus
Premium Bond winnings

Am I on the right track? And does it matter whether investment income is paid out or simply reinvested?

[Lee Young]

Premium bond prizes are not in my view income. Equally I would not include the Christmas bonus or the Winter Fuel Allowance in the figures.

You should include the income ever if it is automatically reinvested.

[Tenareze]

Many thanks for your reply. Do you know if HMRC publish a list of valid income sources for IHT403? Alternatively, if there's no specific list, is there any indication of their general approach or is it all down to interpretation by the officer handling the IHT403 claim?

My thinking behind including premium bond winnings was that, in essence, they derive from a pot of prizes whose value represents a fixed percentage (currently 1.40%) of the total bond investment value. I was treating that 1.40% as the "interest rate", and the winnings as my share of that "interest".

I don't have any special logic for including the Xmas bonus and winter fuel allowance, except that they are both cash receipts in my bank account.

[Lee Young]

I'm not sure there is a list. The rule of thumb to adopt is if it treated as income for accounting purposes then it is income. Prizes are not income.

[pawncob]

https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm14250

[Tenareze]

Thanks for the extra feedback. And apologies for not responding sooner -- I've been away.

As the IHT Manual states: "Common sources of income are employment and self-employment, rents from property, pensions, interest and dividends." So, I guess it's worth asking HMRC directly whether PB winnings can be regarded as "interest". The Xmas bonus and WFA amounts are insignificant, so I'll record them as "possibles only" for my executors to discuss with HMRC if necessary.

[pawncob]

PB wins are NOT income.

[Tenareze]

Well, I spoke to HMRC, and I confess to being pleasantly surprised by their comments.

They pointed out that the IHT Manual makes no explicit reference to PB winnings in the contect of IHT403 income (although they implied that maybe there should be). Nevertheless, they suggested that I record the amounts as "Other Income", together with an explanatory note (to our executors) as to why I had done so. HMRC would then assess the validity of the claim when it is eventually submitted. Interestingly, they said they understood my reasoning for regarding PB winnings as income (but that is not to say they agreed with it, of course).

So, I will follow their suggestion, and leave the detailed discussions to our trusted executors. Of course, it may turn out that the amounts involved are not relevant anyway, as there may well be sufficient qualifying income to cover our gifts.

Thanks to all for your feedback.

[pawncob]

My best wishes to your Executors.

[Tenareze]

Thank you, pawncob. Most kind.

As the object of the entire exercise is to make life as simple as possible for our executors, my plan is to not enter the actual amounts in my IHT403-lookalike spreadsheet, but merely to insert a comment listing the PB winnings, and pointing out that the amounts would be best omitted as they are unlikely to qualify as income. The execs can take it from there as they see fit.