Gifting, Income and Capital

[langtonbrow]

A relative has both monthly pension and investment income, and a discounted gift trust bond paying out monthly.

As she is well funded beyond her current needs she also gifts regularly to family members.

To my understanding the aforementioned bond receipts are not considered income but capital, Consequently they cannot be gifted. In addition they cannot be "spent" as the relative needs to demonstrate that a "normal standard of living" is not impacted by her income gifting. Spending would suggest her standard of living required greater fund availability.

The bond funds are not specifically needed at present, What can be done with it to mitigate eventual future IHT aside from 7 year gifting?

Is there a circumstance where the accumulation of these capital funds can be spent on, for example, short-term respite care in future, potentially being considered as exceptional rather than normal expenditure? Presumably that wouldn't work for longer term care though.

Failing that can they be used for home-based capital investments? I expect that will crop up by raising the home value in IHT terms.

Alternatively can they be allocated for the annual £3000 gift exemption, presumably permissable from capital.

Seems that there is no easy way to distribute these funds.

thank you

[strawn]

"can they be allocated for the annual £3000 gift exemption"

Note that there is also an exemption of £250 per person receiving the gift as long as they haven't received any of the £3000.

So each year I gift £3k plus 3x£250. I change which recipient gets the big prize each year.

One more thing: if your relative hasn't used the £3000 before she can carry forward the unused £3k for one year so that, for instance, in 26/27 she could gift £6k, being £3k for 25/26 plus £3k for 26/27, (plus the little 'uns for 26/27).

[langtonbrow]

Thanks for the reply above. I'd forgotten about the unlimited number of smaller sums. Every little helps!

[AGoodman]

I think you may be under a few misapprehensions:

1. You can absolutely spend and/or gift capital receipts.
2. You are correct that the normal expenditure exemption would not apply to capital gifts.
3. Any non-exempt gift (i.e. not covered by any of the exemptions) would be a potentially exempt transfer - i.e. exempt if they survived for 7 years. If they died within that period, it would be added back into their estate for IHT.
4. However, bear in mind that if they do not spend or gift the sum, it still remains in their estate for IHT (because they still have it)
5. There is therefore nothing to lose from an IHT perspective by gifting capital - if they survive for 7 years it is exempt and if they do not, the tax liability on their estate would be in the same position as it would have been absent the gift.

This all presupposes that their estate would be taxable in any case. Somebody who has never married (or has since divorced) nor has children will only have a nil rate band of £325k, but others may be up to £1m.

[langtonbrow]

I think you may be under a few misapprehensions:

1. You can absolutely spend and/or gift capital receipts.
2. You are correct that the normal expenditure exemption would not apply to capital gifts.
3. Any non-exempt gift (i.e. not covered by any of the exemptions) would be a potentially exempt transfer - i.e. exempt if they survived for 7 years. If they died within that period, it would be added back into their estate for IHT.
4. However, bear in mind that if they do not spend or gift the sum, it still remains in their estate for IHT (because they still have it)
5. There is therefore nothing to lose from an IHT perspective by gifting capital - if they survive for 7 years it is exempt and if they do not, the tax liability on their estate would be in the same position as it would have been absent the gift.

This all presupposes that their estate would be taxable in any case. Somebody who has never married (or has since divorced) nor has children will only have a nil rate band of £325k, but others may be up to £1m.

Appreciate that – it’s helpful and clearly set out.
I think the explanation strikes a balance between the technical position and the practical reality. Implicitly, capital receipts could fund a proportion of lifestyle, freeing up more income to be treated through gifting.
The point about there being no downside from an IHT perspective is also particularly useful – it reframes the decision as there are no wrong moves. That said based on age and health the relative would be fortunate to survive 7 years (from an actuarial perspective).
The point relating to taxable estate can also be closed out. Was previously married, now a widow with husband having invoked a discretionary will trust over 20 years ago to carry forward a nil rate band from the days when that wasn't an automatic option. Hence no transferrable band, it is already being used.

Again, thank you for clarifying.

[AGoodman]

I see a lot of people (IRL and online) who seem to forget about point 4.

If this person has ever owned a home, their estate may also benefit from 2x the residential nil rate band, adding a possible £350k to the basic £325k NRB.

[langtonbrow]

I see a lot of people (IRL and online) who seem to forget about point 4.

If this person has ever owned a home, their estate may also benefit from 2x the residential nil rate band, adding a possible £350k to the basic £325k NRB.

Many thanks. The penny is starting to drop and what I think you are saying is the £175k could be doubled up from my relatives existing RNRB and her deceased husbands "unused" RNRB to create a possible £350k. The house is left to direct descendants, so this may be possible.

My assumption was that her husband deceased long before this was introduced (2017, by George Osborne). Her husband ringfenced his NRB in trust before death (£240K in those days) and I thought that was an end of it, for his allowances.

It seems that, in this circumstance, a historic RNRB could be re-invoked in future, to further minimise IHT.