Gifts out of Income for IHT Purposes.

[Charlottesquare]

Does that apply to gifts from income?

So for example if I give you £5,000 from income but then say to you "Don't spend it as I may need it back" then am I essentially reserving a benefit?

If you didn't need the money then it is a gift from income. That you've imposed conditions is a very strong indicator that it isn't a gift out of income. Bear in mind that a gift is the voluntary transfer of property where the recipient receives all of the property rights (in particular the right to exclude, so the gift giver has no right to use the property once it has been gifted).

HMRC probably wouldn't consider this to be a gift in the first place because you are imposing conditions which severely restrict how they can spend it. Now how the Revenue could prove it is another matter altogether (which is why many gifts are made in cash, or in the form of goods, which IMHO is one of the reasons why the state is increasingly favouring the elimation of cash).

There are a few exceptions to the restrictions applying to the gift, such as gifting property but as part of the gift you impose a restriction on how they can use it but you do not retain any property rights in the gift (so it is a gift). For example, gifting land but adding a covenant which means that the land can only be used for farming.

The main type of gift with reservation that I used to encounter was where the parents had gifted the house to their children but then continued to live in it rent-free. In order to make it a gift the parents would either have to move out or pay market rent (and be treated as a tenant). Lots of solicitors have articles on this, here's one linked below:

https://www.gnlaw.co.uk/news/gift-with-reservation-of-benefit-iht/

Another thing to watch out for when making gifts is if you get something back in return, because this could turn the arrangement into a contract.

As to the valuation of chattels, the Revenue is really interested in valuable individual items such as jewelry, classic cars and high-priced antiques (items which might appear on Antiques Roadshow but not on Bargain Hunt). In my experience they really aren't all that bothered about getting accurate valuations of televison sets, carpets, non-antique furniture and most other household items and will happily accept broad brush estimates. And there is always plenty of scope for experts to disagree about the valuation of items, and to justify a much lower valuation if it is for probate purposes (what value to put on a pedigree cat, for example).

Whilst jewelry does often transfer down generations outwith estates those who so indulge need to be careful that none of it is individually listed in that pesky schedule to the house contents insurance policy- so lots of items at say £2.5k/£5k per item might be the way to go, effectively a lot of Etsy purchases.

[funduffer]

When my mother died, I as the executor, had to untangle the story of gifts. My mother was generous and had gifted £10K to each of the 7 grandchildren over the years, some inside the 7 year limit, some outside. She also gave annual birthday and Christmas cash gifts of different amounts to her children and grandchildren.

I had access to her bank account records, so the approach I took was to look at the total amount of income coming into the account each year for her last 7 years, and the total amount of expenditure. She always had a healthy surplus which I could easily show was larger than the gifts she gave out.

This was accepted by HMRC.

FD

[Lootman]

When my mother died, I as the executor, had to untangle the story of gifts. My mother was generous and had gifted £10K to each of the 7 grandchildren over the years, some inside the 7 year limit, some outside. She also gave annual birthday and Christmas cash gifts of different amounts to her children and grandchildren.

I had access to her bank account records . . .

It was similarly easy for me to check for any gifts that my parents had made, since they had a single bank account and no other accounts. That generation had very simple financial arrangements. And moreover they kept their paper bank statements and chequebooks forever, all in one location.

Anyone seeking to determine my gift history would have to look at 7 years worth of statements for a savings account, 2 current accounts, 3 share-dealing accounts, 4 credit cards and a paypal account. And few paper statements. I have no idea how any executor would achieve that, And which is why I keep a running record of my gifts, dropping entries after they are 7 years old. I imagine that my executors will simply use my list and not bother searching my accounts.

[DrFfybes]

It was similarly easy for me to check for any gifts that my parents had made, since they had a single bank account and no other accounts. That generation had very simple financial arrangements. And moreover they kept their paper bank statements and chequebooks forever, all in one location.

Anyone seeking to determine my gift history would have to look at 7 years worth of statements for a savings account, 2 current accounts, 3 share-dealing accounts, 4 credit cards and a paypal account. And few paper statements. I have no idea how any executor would achieve that, And which is why I keep a running record of my gifts, dropping entries after they are 7 years old. I imagine that my executors will simply use my list and not bother searching my accounts.

I can see keeping a record is a very good idea, but do you regularly make gifts from all those accounts?

If we consider semi regular cash gifts (which as this thread is "Gifts from income" I think is taken as read) then can see using the current accounts and pehaps Paypal. But transferring money to someone via credit card would be expensive, and savings and dealing accounts are restricted to transferring cash to a nominated current account in the name of the accountholder so making gifts from them would be traceable via the current account unless you went to extremes.

We have lots of different accounts, but all gifts come from our personal current accounts, which makes things far simpler all round.

Paul

[AJC5001]

But transferring money to someone via credit card would be expensive

Paul

But paying for a 'Gift' (expensive watch, car, holiday, whatever) with a Credit Card would not show up in the current account other than being the payment of the Credit Card.

Adrian

[Lootman]

But transferring money to someone via credit card would be expensive

But paying for a 'Gift' (expensive watch, car, holiday, whatever) with a Credit Card would not show up in the current account other than being the payment of the Credit Card.

Yes and in my case I make about 100 charges a month on my credit cards. I cannot imagine the average executor looking at about 8,400 individual charges and expect to be able to figure out the gifts from normal spend on myself. Maybe a professional being paid by the hour might, I suppose.

DrFfybes is correct that you should make it easy for your executor by documenting your gifts. I think it is reasonable for your executor to rely upon such a list if it exists rather than conduct a vast investigation into your financial history. After all the only person who actually knows all the gifts is no longer alive at that point.

Note however in my gift list I omit small items of generosity like buying someone dinner. And any transfer where I consider that I got something in return.

[DrFfybes]

But transferring money to someone via credit card would be expensive

Paul

But paying for a 'Gift' (expensive watch, car, holiday, whatever) with a Credit Card would not show up in the current account other than being the payment of the Credit Card.

Adrian

You'd notice that bill going out of our current account, and anyone with that sort of spare income would (or at least should) be keeping good records for IHT, or deliberately obfuscating it

[JonE]

You seem to have convinced yourself that you are right.

You're over-stepping the mark in suggesting I've convinced myself that I'm 'right'. My wording of my 'current view/hope' (added emphasis not in original text) regarding all PB prizes/gifts being included in the 'normal' pattern surely indicates that I remain uncertain that treatment of an unusually large amount would necessarily be exempted.

That one aspect is why I started the thread seeking real world experience and/or knowledge of precedents & practice on that point.

Thankfully, I have never needed to complete the relevant page of IHT403 whenever I've acted as executor but my own executor would not find it daunting as I maintain comprehensive and detailed records (based around Quicken 2000[1]) which clearly demonstrate that living expenses are more than covered by other income sources with income arising from PBs being surplus income. The only fly in the ointment is whether an unusually large win (and therefore gift) might be regarded as outside the well-established 'normal' exempted pattern of unfailingly gifting all prizes to one donee. Logic might suggest one answer - but this is taxation!

Cheers!
[1] My executor would have absolutely no difficulties using Q2k - especially as I've pre-defined all reports that might be relevant. There are reports of this same UK version installing and working on Win11.

[Lootman]

You seem to have convinced yourself that you are right.

my own executor would not find it daunting as I maintain comprehensive and detailed records (based around Quicken 2000[1]) which clearly demonstrate that living expenses are more than covered by other income sources with income arising from PBs being surplus income.

[1] My executor would have absolutely no difficulties using Q2k - especially as I've pre-defined all reports that might be relevant. There are reports of this same UK version installing and working on Win11.

As an executor I personally would be most displeased if the subject estate:

1) Required me to have a working knowledge of any software package.

2) Involved me having to deal with copious amounts of data that requires said software

3) Relied upon a conjecture that an unproven strategy will be accepted by the taxman.

And of course your chosen executor might not be around, available or willing to act. In which case a professional will be needed, paid for by your estate, and at great cost given all those "comprehensive details".

There are simpler, more effective and less risky ways of mitigating IHT.

[genou]

You seem to have convinced yourself that you are right.

You're over-stepping the mark in suggesting I've convinced myself that I'm 'right'. My wording of my 'current view/hope' (added emphasis not in original text) regarding all PB prizes/gifts being included in the 'normal' pattern surely indicates that I remain uncertain that treatment of an unusually large amount would necessarily be exempted.

Here we go

21Normal expenditure out of income.
(1)A transfer of value is an exempt transfer if, or to the extent that, it is shown—
(a)that it was made as part of the normal expenditure of the transferor, and
(b)that (taking one year with another) it was made out of his income, and
(c)that, after allowing for all transfers of value forming part of his normal expenditure, the transferor was left with sufficient income to maintain his usual standard of living.


I think if your exec can show your commitment in advance to donate as described ( i.e. the expenditure is normal ), you win. Unless the large PB win fell in a year/series of years where you actually dipped into capital for some reason.

I'd guess HMRC would sit up if you won and donated a 1M, but the principle stands - it's normal, it's out of income, and you have not tightened your belt. If they take issue with that, I'd cheerfully tell them to put or shut up. I can't believe they'd take it to tribunal, and if they did, I believe they'd lose.

For comparison, OH parents gave regular donations to grandchildren. But the grandchildren were, amazingly, of different ages and received different total amounts over time.

GF was aware that the nominal gifts to each GC were different, and made some effort to fix it, but his arithmetic wasn't great. So we fixed it after his death with balancing gifts from his widow to the children. One got nothing, the others varying amounts, to balance the nominal*. These balancing gifts were hugely larger than the ongoing monthly gifts, but they are clearly part of normal expenditure ( the gift series is now 25+ years old ), and can be demonstrated to be out of income taking one year with another, and there is sufficient income to maintain GM's lifestyle.


Of course, none of this is advice......

PS the whole "regular" stuff is HMRC gloss on the legislation, but giving regularly clearly does no harm.

*no one had the energy to do it properly.

Edited to fix horrible repetition of "in total"

[Lootman]

I think if your exec can show your commitment in advance to donate as described ( i.e. the expenditure is normal ), you win. Unless the large PB win fell in a year/series of years where you actually dipped into capital for some reason.

I'd guess HMRC would sit up if you won and donated a 1M, but the principle stands - it's normal, it's out of income, and you have not tightened your belt. If they take issue with that, I'd cheerfully tell them to put or shut up. I can't believe they'd take it to tribunal, and if they did, I believe they'd lose.

OK, let's assume for a moment that Jon's executor has not already lost the will to live having had to deal with quicken files and a cynical taxman. How much has been saved here?

The maximum PB holding is £50,000 and given a 4% or so average payout return, this amounts to an income of £2,000 a year or so. After 7 years gifts vanish anyway. So the max amount of those gifts is £14,000.

40% tax on £14,000 is £5,600.

If Jon is like a good number of Lemons here and has a 7 or 8 figure net worth then £5,600 is chump change. It really does not move the needle. And for that his executor has to jump through hoops and maybe even attend a tribunal?

And even all that assumes that he does not leave behind a spouse or civil partner, in which case IHT is moot anyway.