regular gifts out of surplus income

[Bouleversee]

Perhaps the tax experts on here know the answers to the following. To qualify for tax relief under the above heading, does the money have to come from this year's income, of which there is not likely to be much, if any, surplus? Could I use last year's accumulated dividends in my ISA which I didn't withdraw or invest or the interest credited to a cash ISA over many years, none having been withdrawn, if I calculate it on the basis of simple interest on the original sum rather than the compounded interest? I am trying to find a way of helping my children (one of whom is now receiving almost no income thanks to Covid-19)) and grandchildren by paying towards school fees etc. without incurring an IHT charge if I pop my clogs before 7 years which is quite likely now, whereas I had always assumed I would live till at least 90 as all my predecessors have done. As a matter of interest, if I pay the fees direct to the school, who would any IHT due be chargeable to, the child or the parent?

[scrumpyjack]

https://www.pruadviser.co.uk/knowledge- ... exemption/

If it is covered 'taking one year with another' that's fine. So one year's dividend drought should not matter if you can show over a number of years that your income covered your normal expenditure plus gifts out of income.

ISA income, even if left in the ISA, should be OK as it is still 'income' but undrawn income within a pension fund would not, as I understand it, be able to be included in the 'income' figure.

You should record this calculation so that your executors can demonstrate that the gifts were made out of income and you had assured yourself, taking one year with another, that that was the case.

[scrumpyjack]

Also, re the school fees etc, don't forget the 'Family Maintenance' IHT exemption

https://www.canadalife.co.uk/adviser/ne ... nd-reliefs

[PinkDalek]

... ISA income, even if left in the ISA, should be OK as it is still 'income' ...

Some of the ISA income described in the OP has been accumulated over many years, so I'd be far more cautious than you would appear to be.

I haven't studied either of the links provided so far and will try and dig out prior discussion on TLF if time available/I remember.

In the meantime I have this bookmarked, which is worth a study (as well as related pages):

Lifetime transfers: conditions for normal out of income exemption: Case Law - MacDowell
https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm14251

[Bouleversee]

Many thanks to both. Will look at it tomorrow when I am less exhausted after an evening's gardening.

[PinkDalek]

I'd also look at (my underlining):

Dispositions for the maintenance of the transferor's family: maintenance of the transferor's children
https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm04175

Not grandchildren and I don't think the pages following that one assist.

You also saw this in May 2018 (not a modern article) How are grandparents' school fees payments affected by IHT? https://citywire.co.uk/new-model-adviser/news/how-are-grandparents-school-fees-payments-affected-by-iht/a631692.

Your reply then stated Thanks to Pink Dalek and Meldrewlives. The article linked by PD seems to contradict itself as regards payments of school fees etc. However, payment of school fees directly is not increasing the estates of the grandchildren so presumably they could be paid out of capital, possibly paying several years fees upfront (I believe some schools have schemes for that). I will have to find time to look it up on HMRC's website. Not enough hours in the day for everything I need to deal with. from viewtopic.php?p=138723#p138723. Also see the reply by meldrewlives over there which is above my (non) pay grade.

[fca2019]

Lucky grandkids, I'm sure when they're older they'll be grateful!!

I'd simply record it as a gift not worry about the complexities.

If you have an estate over the threshold you should strictly record all gifts, but no-one will be fussed about very small gifts.

The gifts get added to the gross value of the estate. That's really the beneficiaries issue of sorting that out.

If there is a tax bill the executor usually pays out the estate.

The bill reduces after 3 years. 7 years gift is exempt, but 3 to 7 years attracts taper relief. Hope that's useful.

[PinkDalek]

I'd simply record it as a gift not worry about the complexities. ... The bill reduces after 3 years. 7 years gift is exempt, but 3 to 7 years attracts taper relief.

Those comments are open to misinterpretation.

If you look at what meldrewlives wrote here viewtopic.php?p=138705#p138705 the suggestion is such payments are not Potentially Exempt Transfers in the first place.

Regarding the question:-

"In the meantime, can anyone tell me whether paying school fees or university expenses directly (as opposed to giving the dosh to children/grandchildren) still counts as a potentially taxable gift."

The IHT rules stipulate that for something to be considered as a PET there MUST be an increase in the transferee's estate. The approach proposed above would not be consistent with that stipulation.

Edited to add: The stipulation applies to PETs but not to e.g. normal expenditure out of income.

Taper relief for gifts (which these potential payments may not be) only comes into play if the applicable NRB is exceeded by such gifts. If not, no taper.

https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm14611 includes:

Although we use the term taper relief it is not strictly a relief as defined elsewhere in the Inheritance Tax Act. Instead it takes the form of a percentage reduction in the tax which would otherwise be payable on the transfer. So, if no tax is payable on the transfer because it does not exceed the Inheritance Tax (IHT) nil rate band (after cumulation (IHTM14502)), there can be no relief.

Taper relief does not reduce the capital value of the transfer.

[Bouleversee]

PD: I couldn't find any previous posts when I did a search on this yesterday, so thought it simpler to start again. I think that was at the time my medical issues started and I had the battle with the council over the maintenance of our road which went on for months and this sort of thing was put on the back burner. I need to read it all again, very slowly, as it is all rather contradictory and confusing. I still think the article you linked to was very badly written and confusing and I am still not clear as to payment of school fees whether to the school or the parents, but I agree with you that the Family Maintenance IHT exemption doesn't seem to apply in my case. I will post again when I have had time to think it through. In the meantime, more urgent work needed in the garden before it gets too hot.

[PinkDalek]

On the subject of searches on here, externally via Google or similar is the only realistic way and then it helps to know what to search for in the first place! There are reasons which I shan’t go into but stooz and others have explained over at the Biscuit Bar as to why you may not find much using an internal search.

The article I found back then was only a random one. I wasn’t claiming there aren’t better examples.

Some topics I try to bookmark when I remember.

[Bouleversee]

Yes, I must find out how to do that. You know how useless I am when it comes to computers.

[scrumpyjack]

... ISA income, even if left in the ISA, should be OK as it is still 'income' ...

Some of the ISA income described in the OP has been accumulated over many years, so I'd be far more cautious than you would appear to be.

I haven't studied either of the links provided so far and will try and dig out prior discussion on TLF if time available/I remember.

In the meantime I have this bookmarked, which is worth a study (as well as related pages):

Lifetime transfers: conditions for normal out of income exemption: Case Law - MacDowell
https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm14251

I wasn't saying you could take the accumulated ISA income as 'income' for a single year in the calculation, but you can, I believe, take each years ISA income as part of your available income for that year.

[tjh290633]

I understand that, if you make monthly payments by direct debit or standing order, and making the payments do not have an adverse effect on your standard of living, then that is fine. That does not preclude taking cash from savings to buy a new car, for example, or to meet some other unusual expense. Taking accumulated dividends from an ISA would only be taking regular income.

That is my interpretation and not that of the HMRC. It is what I do, however.

TJH

[PinkDalek]

Apologies for this delayed response.

I wasn't saying you could take the accumulated ISA income as 'income' for a single year in the calculation, but you can, I believe, take each years ISA income as part of your available income for that year.

My mistake and I don't really know why I misunderstood what you were saying but I'd assumed you were talking of all the accumulated income.

On that front and, yes, I know these are HMRC's views but Lifetime transfers: conditions for normal out of income exemption: out of income https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm14250 includes:

Available income

You should initially look at the income of the year in which gifts were made to see if there was enough income available to make the gifts, before considering earlier years. Income from earlier years does not retain its character as income indefinitely. At some point it becomes capital but there are no hard and fast rules about when this point is. If there is no evidence to the contrary, we consider that income becomes capital after a period of two years. and then read on.

There is also the issue about Regularity/Pattern of gifts about which we haven't been told anything in this thread at least but I believe certain payments may have been made in the past along similar lines, maybe direct to the adult children, as against paying the fees to the school for the grandchildren. There has also been prior talk of share gifts to the adult children etc.

That having been said, what is your view on the extracts I've provided from a past meldrewlives post? In other words, if Bouleversee pays the education fees direct, we may not be looking at PETs at all but may still be looking at attempting to qualify under normal expenditure out of income lines. I must say I'm confused generally on that aspect, especially due to lack of sleep.

I hope I won't get flamed but the OP (who a number of us have had the pleasure to meet) has been doing her IHT and other tax planning herself, as it were, for many a year. Others have suggested taking professional advice but I recall this has been resisted, sometimes forcefully. I shan't say any more but I think my views are probably known to the OP, which is even more relevant now than it would have been with regards to her posts over the years, now she mentions clog popping more often than in the past.

PD

PS I've ignored the oft mentioned 8 year table on page 8 here https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/750238/IHT403_10_18.pdf on this thread but they still show Interest (including PEPs and ISAs), which is understandable, but when they get to income from Investments that word has no mention of ISAs (or PEPs) and has always been thus, as far as I can remember. Of course, that is only a Guide This is a guide to the type of income and expenditure the deceased may have had so that you can show that gifts made were part of the deceased’s normal expenditure out of their income and one can readily prepare one's own version, as do I, with one's own descriptions.

[PinkDalek]

.... Taking accumulated dividends from an ISA would only be taking regular income.

That is my interpretation and not that of the HMRC. It is what I do, however.

Maybe you haven't read all the links now provided. Most of us doing it ourselves will never know what happens in the hopefully far distant future, when their Administrators have to deal with IHT ...

Cheers by the way (another a number have had the pleasure to meet, on a number of jolly occasions),
PD

[yorkshirelad1]

Perhaps the tax experts on here know the answers to the following. To qualify for tax relief under the above heading, does the money have to come from this year's income, of which there is not likely to be much, if any, surplus? Could I use last year's accumulated dividends in my ISA which I didn't withdraw or invest or the interest credited to a cash ISA over many years, none having been withdrawn, if I calculate it on the basis of simple interest on the original sum rather than the compounded interest? I am trying to find a way of helping my children (one of whom is now receiving almost no income thanks to Covid-19)) and grandchildren by paying towards school fees etc. without incurring an IHT charge if I pop my clogs before 7 years which is quite likely now, whereas I had always assumed I would live till at least 90 as all my predecessors have done. As a matter of interest, if I pay the fees direct to the school, who would any IHT due be chargeable to, the child or the parent?

I share your anxiety, and appreciate all the thoughts others have posted, and tend to concur. I too am confused about "regular", "out of surplus income", "7 years PET", "taper" etc etc.
All I try to do is make things as simple as possible, keep good documentation (where it may be found by exors), and make things easier for my exors.
There seems to be scope for confusion on the gift rules/exemptions, even amongst the professionals. And there's the recurrent suggestion of IHT reform (so what is true now may not be true when the grim reaper calls).

[scrumpyjack]

Tax is not my specialism but I think if you set out and document your intentions clearly, and prepare a schedule in the format of the IHT form, and so establish a pattern of gifts demonstrating your commitment and your view that they are made out of available income, it would be difficult, and so unlikely, that HMRC would challenge it. The schedule could also cover the two years before the gifts started as HMRC themselves seem to agree that two years previous unspent income can still be regarded as ‘income’ for these purposes. I'm sure ISA dividends can be included as income, as ISA interest is. Perhaps the drafter of the form had only heard of a Cash ISA!

Note also that, in the schedule, it refers to tax paid (not tax incurred). The calculation is not a calculation driven by tax law, but a cashflow calculation.

Probably a good idea for regular amounts to be paid monthly or quarterly to establish a pattern.

As to whether prepaying direct to the school a number of years fees could get round the problem, I really don't know. As PD says PETs come out of the tax free allowance first, so you would need to give an awful lot away!

As to the argument that such an upfront payment direct to the school would not be a PET as it would not increase the value of the Transferee's (The School!) estate, I'll leave that to a Tax Barrister.

[scrumpyjack]

A follow up on the payment of school fees up front. Carl Bayley's excellent IHT book covers this.

As there is no increase in the transferee's (school) estate, it is not a Potentially Exempt Transfer. Instead it is a Chargeable Transfer immediately chargeable at the lifetime rate (20%), and if you die within 7 years more tax to pay!

[PinkDalek]

A follow up on the payment of school fees up front. Carl Bayley's excellent IHT book covers this. ...

Do you have the 'Optional Free PDF Copy' and, if so, is it searchable?

How to Save Inheritance Tax 2019/20
By Carl Bayley BSc FCA
PUBLICATION DATE: MAY 2019 PAGES: 276 EDITION: 15th ISBN: 9781911020455
£28.95
https://www.taxcafe.co.uk/inheritance-tax.html

[scrumpyjack]

No I got a cheap 2nd hand 2018/19 one, e-bay I think