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Where Taxpayers and Advisers Meet

Identifying surplus income for the purpose of making gift

skray
Posts:58
Joined:Mon Oct 29, 2012 5:01 pm
Identifying surplus income for the purpose of making gift

Postby skray » Tue Jul 26, 2022 8:18 pm

Hi

I came across this article which seems to say that gifts made out of surplus income is IHT exempt (i.e. this is over and above £3000 per year and £250/person/year).
"There are no set rules about when accumulated income becomes capital but HMRC normally considers this to happen after two years. This may be a problem where income has been accumulated."

I have a salary account that is older than 2 years hence the funds held here consists of both salary earned in last 2 years and earlier. Besides I pay for my expenses, make investments from this account. My query is if there is an objective way of separating income in last years from earlier. If I pay out a gift can I take it for granted I am paying from surplus income, or is there any FIFO or LIFO type of rule applicable.
I am aware non doms who are liable to pay tax on remittance basis - if they are remitting funds e.g. £3K from an account having an account balance of £12K consisting of £10K principal + £2K interest - then HMRC will consider the remittance is £2K interest + £1K principal and ask for tax to be paid on £2K. The way to avoid paying tax is to get the bank to pay the interest on a separate account such that the balance in the base account never grows higher than principal amount £10K. Then any remittance made from this account is entirely capital and no tax payable.
Is any such strategy needs to be adopted if I am paying gift from surplus income. e.g. just before salary payment is due I transfer the entire balance to a different account, then once salary received make the gift and then bring the money back to the salary account?

-------------------------
https://www.mercerhole.co.uk/wp-content/uploads/2019/07/bn_Gifts-out-of-income.pdf

Gifts must be made out of income
The exemption only applies where expenditure is from surplus net taxable income. Examples of income
include salary, dividends, interest, pensions, rental income, business profits, etc. Ideally, income should
be identified in the year in which gifts are made to demonstrate that there is sufficient income available,
before considering earlier years. Income from earlier years does not retain its character as income
indefinitely. There are no set rules about when accumulated income becomes capital but HMRC normally considers
this to happen after two years. This may be a problem where income has been accumulated.

This is corroborated by
https://www.gov.uk/inheritance-tax/gifts
"Birthday or Christmas gifts you give from your regular income are exempt from Inheritance Tax."

Regards

strawn
Posts:96
Joined:Fri Jun 01, 2012 10:11 am

Re: Identifying surplus income for the purpose of making gift

Postby strawn » Tue Jul 26, 2022 11:32 pm

surplus net taxable income

I suspect the taxable is wrong. I'd certainly expect income generated within ISAs, for instance, to be available for gifting in this way.
HMRC documents tend to make grim reading but maybe that's a price to pay.

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

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

Re: Identifying surplus income for the purpose of making gift

Postby AGoodman » Wed Jul 27, 2022 9:48 am

No, I don't think there is any FIFO/LIFO rule applicable. It needs to be income though.

I always recommend keeping records in the form on page 8 here (because that's the info the executors need and they won't thank you if they have to compile it themselves):

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/917890/IHT403-05-20.pdf


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