JeffW55 wrote:Thank you for the feedback so far; it’s very encouraging.
My background explanation could have been better:
I am aware of the HMRC stuff about surplus income, but I would need a few OU courses to have a chance of understanding.
Both of us have been giving a good deal of our surplus income, as well as our annual £3K exempt gift amounts, to our children since we retired - 7 years ago and 5 years ago.
We have assumed the £3K tax-exempt gift amounts can be funded from capital.
It's my wife who deferred her state pension and it was for 10 years, so it's a very substantial amount that dwarfs her usually variable income.
She has given most of her variable surplus income - from 65% to 85% of the surplus each year - as gifts to the kids.
It appears to me she has established a pattern of giving over 5 years and, I would say, it's a pattern that involved most of her annual surplus income each year.
Surely, it's reasonable that:
- if she had taken her state pension from the start and given it away as surplus income, that would have been completely justifiable.
- if she had taken the deferral as an uplift to her state pension, treatment of her (doubled) state pension as surplus income would have been allowed.
Therefore, if her deferred state pension lump sum (taxed at her marginal rate, as it was) is considered income, shouldn't it be possible to include it in this year's surplus income calculation?
That sounds reasonable - but I'm afraid sounding reasonable is by no means a guarantee that taxation rules allow it. But even supposing that taxation rules do allow it to be included in this year's surplus income calculation, that only says that the gifts qualify for the 'out of income' aspect of the 'normal out of income' exemption, still leaving the question of whether they qualify for the 'normal' aspect. And that's something I'm very unclear about - basically, if I understand you correctly the
size of the proposed gifts is definitely not normal, but
how you calculate that size is normal. And it seems to me that the HMRC manual quote:
The amount of the gift is an important factor. The gifts must be comparable in size although you do not need to query small differences. Sometimes, gifts may be made by reference to a source of income that is by its nature variable in amount, for example annual dividends from company shares. Similarly, gifts may relate to specific costs such as grandchildren’s school fees which may also vary in amount.
is rather ambiguous guidance on the issue: the proposed gifts are presumably quite a long way from being "comparable in size" with a normal year's gifts, but the implication of the third sentence is that at least sometimes, it's OK for their size to be determined in a formulaic manner from something about the gift-giver's income that varies from year to year. But that something is variation in the amount of income from a normal source; their income varying because a large one-off source of income appears in one year might be a different matter... In short, your case is in a very grey area of my understanding about 'normal out of income' gifts, so I cannot come to any clear opinion either way on it.
I would also guess that to do much better than that level of uncertainty, you'll need an answer from someone with reasonably extensive experience of actual HMRC practice about such gifts - which probably means employing a suitably specialised tax adviser (who will probably be a member of STEP, the Society of Trust and Estate Practitioners) unless you're lucky enough to find such a person here. Note that even such a person won't be able to give you a totally definitive answer, because it will be tax law and HMRC practice when your wife dies that will determine the answer, and either or both might change between now and then.
Whether it's worth the cost of employing such a tax adviser (I doubt they'll be cheap!) is a matter of how much money is involved and how likely it is that the question will end up being relevant. In particular, if your wife is in a good state of health and should have a good chance of surviving 7 years, it might be worth just making gifts calculated on her normal 65-85% of surplus income basis now, and only employing a specialist tax advisor for advice about whether the exemption can reasonably be claimed if she doesn't survive 7 years. On the other hand, employing a specialist tax advisor now would mean that you could get advice about how to make the gifts now so as to maximise the chances of successfully claim the exemption when the time comes.
If you come to the conclusion that it's best not to employ a specialist tax adviser now, my personal inclination would be to make gifts as suggested in the last paragraph, i.e. calculated on her normal 65%-85% of surplus income and given now, and hope that the whole question of whether they qualify for the 'normal out of income' exemption is rendered moot by her surviving at least another 7 years. There is the possible alternative of spreading the gifts out over three to four years, which probably increases the chance of them being treated as part of a normal pattern of giving - but has the drawbacks of (a) making it less certain that the later gifts will still count as 'out of income'; (b) meaning that she has to survive for around 10 years to render the question of qualifying for the exemption moot rather than just 7. I do emphasise though that that's my personal inclination, probably quite strongly influenced by a personal preference for keeping tax matters as simple as reasonably possible, and
not an opinion about which is the better course of action in any objective sense.
Gengulphus