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Does this Qualify as Capital Expenditure

Practical Issues
JeffW55
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Does this Qualify as Capital Expenditure

#391746

Postby JeffW55 » March 3rd, 2021, 9:10 am

Hi,
I am regularly making gifts out of surplus income to children and grandchildren (avoiding inheritance tax, I hope).
This year, I have had a busy time improving my house. Specifically, I have combined most of my garage (3.4m x 2.2m of it) with my kitchen in order to remodel the kitchen, including 2 big Velux windows in the roof, new garage doors (couldn't open both without breaking one) and replacing a laurel hedge that formed the border from garage to near the front fence (15m); the hedge was well over 40 years old and had become unmanageably tall and wide.
So, the building and fit out work has cost 34K, removing hedge 750, new fence 1800 and garage doors 2.5K.
I fully intend putting the extension/conversion 34K down as a capital expense, justifiably (?) avoiding any impact on my surplus income.
The garage doors had to be done and so did the hedge replacement.
Will the garage doors and hedge replacement / fence erection be acceptable as capital expenses when my surplus income is eventually validated by HMRC, do you think?
And any other comments, of course.
TIA, Jeff

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Re: Does this Qualify as Capital Expenditure

#391748

Postby swill453 » March 3rd, 2021, 9:19 am

JeffW55 wrote:Will the garage doors and hedge replacement / fence erection be acceptable as capital expenses when my surplus income is eventually validated by HMRC, do you think?

What is this "validation" of which you speak? What will trigger that?

Scott.

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Re: Does this Qualify as Capital Expenditure

#391750

Postby scrumpyjack » March 3rd, 2021, 9:22 am

There is a general principal of 'taking one year with another' to establish whether gifts are covered by surplus income, so don't get too hung up on whether one particular year did not have surplus to cover the regular gift, if other years compensated for that.

Also don't forget that income within one's ISA counts as available income even though you leave it in the ISA.

Here is a useful paper on the whole subject.

https://documents.canadalife.co.uk/gift ... income.pdf

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Re: Does this Qualify as Capital Expenditure

#391799

Postby PinkDalek » March 3rd, 2021, 11:52 am

swill453 wrote:
JeffW55 wrote:Will the garage doors and hedge replacement / fence erection be acceptable as capital expenses when my surplus income is eventually validated by HMRC, do you think?

What is this "validation" of which you speak? What will trigger that?


The OP would be talking of the detail requested by HMRC on page 8 of IHT403 https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/917890/IHT403-05-20.pdf if his Administrators were to make such a claim.

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Re: Does this Qualify as Capital Expenditure

#391807

Postby swill453 » March 3rd, 2021, 12:10 pm

PinkDalek wrote:
swill453 wrote:
JeffW55 wrote:Will the garage doors and hedge replacement / fence erection be acceptable as capital expenses when my surplus income is eventually validated by HMRC, do you think?

What is this "validation" of which you speak? What will trigger that?

The OP would be talking of the detail requested by HMRC on page 8 of IHT403 https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/917890/IHT403-05-20.pdf if his Administrators were to make such a claim.

In that case I guess the question the OP is asking is whether the "capital expenditure" can be omitted from "Other" expenditure.

Scott.

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Re: Does this Qualify as Capital Expenditure

#391820

Postby Gengulphus » March 3rd, 2021, 1:27 pm

I think this question is based on a misunderstanding. As far as I can see, while the tests for the "normal expenditure out of income" IHT exemption care about whether money you're receiving is 'income' or 'capital', they don't care whether money you're paying out is 'income expenditure' or 'capital expenditure'. So it simply doesn't matter whether this large item of expenditure is 'capital expenditure' or not, nor even what that term means.

The important test on expenditure is instead whether it is used to maintain your normal standard of living. All expenditure that goes towards maintaining your normal standard of living counts - and it does mean your standard of living, not anyone else's. For example, I don't drive or own a car, so for this test, I have no expenditure on cars or driving, and the fact that almost everyone else at my wealth level does have such expenditure is of zero relevance to the test. On the other hand, I do probably have greater expenditure on public transport than most people at my wealth level (or at least, I do in a normal year!), and that too doesn't matter to the test: my expenditure to maintain my normal standard of living is what it is, uninfluenced by what others' normal standards of living are.

Some expenditure isn't used to maintain your normal standard of living. E.g. I'm fairly certain donations to charity are such expenditure - though I'd steer clear of writing down anything like "I find the feeling of satisfaction I get from making these donations enhances my life considerably" just in case the taxman takes it too literally... ;-)

And one of the criteria for the "normal expenditure out of income" exemption is basically that the largest amount of gifts it can apply to is (money coming in that counts as income) minus (money going out to maintain your normal standard of living), with that being understood on a "taking one year with another" basis - i.e. not having to apply separately to each individual year, but on average over a number of years. Just how many years, I'm not certain, but for large, infrequent items of expenditure such as buying a new car, I feel it would be reasonable to look at how long a car tends to last you and average over that number of years or fewer. (Fewer is better from the point of view of giving your executor(s) an easier case to argue with HMRC.)

So as applied to your specific issue: I would feel that quite a lot of the expenditure you describe was spent on maintaining your normal standard of living - or at the very least, what will probably have become your normal standard of living in a year or two's time, e.g. being able to open both garage doors might not have been in your normal standard of living, but I'm pretty sure it now is or at least soon will be. On the other hand, it's presumably not an exercise you're intending to repeat for many years to come, so I would also feel that averaging it over many years would be justifiable. So what I think I would do is calculate how many years you need to average it over in order to get the expenditure per year down low enough for the gifts you're making to qualify for the exemption, and try to decide whether that's low enough to be easily defended by your executor(s). If it's easily defensible, go ahead on that basis; if it's totally indefensible, forget it; if it's inbetween, it might be worth consulting a professional tax adviser/accountant who specialises in Inheritance Tax, who will have actual experience of what HMRC will and won't accept.

The other suggestion I would make (regardless of how easy or difficult you think use of the exemption will be) is to talk to your executor(s) about it. If they find themselves thrown in the deep end on this, there's no guarantee that they'll understand what's needed to defend it!

Gengulphus

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Re: Does this Qualify as Capital Expenditure

#391855

Postby JeffW55 » March 3rd, 2021, 3:28 pm

Thank you, so far.
I guess every question raises others like a) why don't I give better, more accurate background so people have a better basis for answering and, b) oh no, it starts to look more demanding than I thought.
On a) both my wife and I, who have similar assets and similar incomes, have been giving gifts out of surplus income for 8 or 9 years. The amounts have increased somewhat during that time, but not extraordinarily when you consider we had to sort out our finances during the first couple of years of retirement and some pensions were not started straightway. Each of us has given less than 200K in total since financial year 2014 - 15. The beneficiaries have been our grown up children.
We calculate surplus income simply:
1. All income declared on self-assessment + ISA income/divis + winter fuel allowance - all tax paid declared on same
minus
2 All payments out of the bank account - any such payment that is justified as not expenditure out of income, as in 3
3 Capital expenditures, (intended) Gifts out of Income, Gifts by 3K IHT Annual Exemption, transfers into temporary savings accounts (my annuities paid annually in May)
Strictly speaking, we don't know for sure that gifts out of income truly are such until the end of the FY, but our income and expenditure have been pretty steady, and our forecasting good enough so far.

On b) Thank you, scrumpyjack. I read the Canada Life thing and was disturbed. I will have to follow it up. At the moment it has left me with a concern that I may need to complete IHT100 soon / on an ongoing basis. My one graspable straw seems to be references either in it or the HMRC IHT100 document I looked through, that it applies if I'm transferring into a trust (no, I am not) or if in the past 7 years I have given more than 325K tax-free allowance on death. Can anybody say whether that is a correct interpretation?
Would be grateful for any more comments.

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Re: Does this Qualify as Capital Expenditure

#391865

Postby scrumpyjack » March 3rd, 2021, 3:48 pm

JeffW55 wrote:Thank you, so far.
I guess every question raises others like a) why don't I give better, more accurate background so people have a better basis for answering and, b) oh no, it starts to look more demanding than I thought.
On a) both my wife and I, who have similar assets and similar incomes, have been giving gifts out of surplus income for 8 or 9 years. The amounts have increased somewhat during that time, but not extraordinarily when you consider we had to sort out our finances during the first couple of years of retirement and some pensions were not started straightway. Each of us has given less than 200K in total since financial year 2014 - 15. The beneficiaries have been our grown up children.
We calculate surplus income simply:
1. All income declared on self-assessment + ISA income/divis + winter fuel allowance - all tax paid declared on same
minus
2 All payments out of the bank account - any such payment that is justified as not expenditure out of income, as in 3
3 Capital expenditures, (intended) Gifts out of Income, Gifts by 3K IHT Annual Exemption, transfers into temporary savings accounts (my annuities paid annually in May)
Strictly speaking, we don't know for sure that gifts out of income truly are such until the end of the FY, but our income and expenditure have been pretty steady, and our forecasting good enough so far.

On b) Thank you, scrumpyjack. I read the Canada Life thing and was disturbed. I will have to follow it up. At the moment it has left me with a concern that I may need to complete IHT100 soon / on an ongoing basis. My one graspable straw seems to be references either in it or the HMRC IHT100 document I looked through, that it applies if I'm transferring into a trust (no, I am not) or if in the past 7 years I have given more than 325K tax-free allowance on death. Can anybody say whether that is a correct interpretation?
Would be grateful for any more comments.


I don't think you do as no IHT is payable at the time of the gift where it is being made from one individual to another individual, and I think that statement is without limit as to amount. No doubt someone else can confirm or qualify this.

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Re: Does this Qualify as Capital Expenditure

#391877

Postby Lootman » March 3rd, 2021, 4:09 pm

JeffW55 wrote:Will the garage doors and hedge replacement / fence erection be acceptable as capital expenses when my surplus income is eventually validated by HMRC, do you think?

Others have answered the substance of your question better than I can. Gifts from income is not something I do, except trivially, preferring other IHT mitigation strategies that do not require such detailed documentation and persnickety rules.

But I did want to suggest that your question should really ask IF there is eventual validation by HMRC and not WHEN. Of necessity HMRC can only examine a small percentage of estates that need to go through probate, and probably almost none of those that do not go through probate.

Now, I would guess that a submission of gifts from income would increase the odds of scrutiny and "validation" (which is another reason why I don't do it). But I would be surprised if it was 100% except for very large estates.

Not that this means that your recording or reporting of data would change in any way. But it is useful to know that most estates are just rubber stamped and you might be unlucky if your estate is moderate and still garners a lot of attention.

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Re: Does this Qualify as Capital Expenditure

#392984

Postby JeffW55 » March 6th, 2021, 8:55 am

Hi Lootman,
Lootman wrote:Others have answered the substance of your question better than I can. Gifts from income is not something I do, except trivially, preferring other IHT mitigation strategies that do not require such detailed documentation and persnickety rules.

Have you or others shared any of your preferred IHT mitigation strategies? I can't be the only one you have left eager to know.
I've heard of gifts to charity and something about AIM.
Charity bequeathed big lump sums: but that's an end of life thing and I shall be preceding my wife, so not my decision I feel.
AIM: for seasoned investors, I imagine, and I don't qualify.
Regards,
Jeff

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Re: Does this Qualify as Capital Expenditure

#393145

Postby Gengulphus » March 6th, 2021, 4:41 pm

JeffW55 wrote:Have you or others shared any of your preferred IHT mitigation strategies? I can't be the only one you have left eager to know.
I've heard of gifts to charity and something about AIM.
Charity bequeathed big lump sums: but that's an end of life thing and I shall be preceding my wife, so not my decision I feel.

Having a spouse and preceding them is one of the best IHT mitigation strategies! ;-) Its only real problems are (a) that 100% ensuring you precede your spouse requires rather drastic actions; (b) that one leaves one's spouse needing to take action to use the same strategy themselves, and that action is liable to be difficult and/or extremely unpalatable.

JeffW55 wrote:AIM: for seasoned investors, I imagine, and I don't qualify.

It requires careful picking of the AIM companies one is invested in - by no means all AIM companies qualify under the rules for the exemption, and you definitely want to go for the steadier companies - the ones that are relatively unlikely to spring a surprise on you. But the only real investment skill that it requires above and beyond what is required for ordinary share investment is IMHO the ability to run a share portfolio in a Long-Term Buy & Hold fashion - in particular, avoiding all temptations to go for quick profits. That's because shares have to be held for at least two years at the time of death to qualify for the exemption, and any selling disrupts that. Simply identifying which shares can be counted as having been held for the required two years in a complex trading record is tricky... So I'd say it doesn't so much require a seasoned investor as a seasoned navigator of government rules! One particular aspect of that navigation is recognising that AIM shares can cease to qualify for the exemption, in a variety of ways ranging from obvious ones like being taken over, to less obvious ones such as a change in the nature of the company's business.

IMHO, though, the biggest issue with that particular exemption is the fact that like the vast majority of IHT exemptions, it's not an exemption one claims oneself, but one that is claimed by one's executors. So ideally, one wants not just to know how to navigate through the sometimes-tricky rules oneself, but also to ensure that one's executors know how to do so - or failing that, that they know to employ a professional pilot (aka specialist tax adviser/accountant). In that respect, the IHT exemption for AIM shares is rather similar to the "normal expenditure out of income" exemption for gifts that is the subject of this thread.

One other thing I would suggest is that if you'd like a more general discussion of IHT mitigation strategies and which ones people prefer, you start a new thread asking about them, with a subject reflecting that. That way, it will be much easier for anyone with a similar query in the future to find it.

Gengulphus

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Re: Does this Qualify as Capital Expenditure

#393204

Postby Lootman » March 6th, 2021, 8:47 pm

JeffW55 wrote:Hi Lootman,
Lootman wrote:Others have answered the substance of your question better than I can. Gifts from income is not something I do, except trivially, preferring other IHT mitigation strategies that do not require such detailed documentation and persnickety rules.

Have you or others shared any of your preferred IHT mitigation strategies? I can't be the only one you have left eager to know.
I've heard of gifts to charity and something about AIM.

Charity bequeathed big lump sums: but that's an end of life thing and I shall be preceding my wife, so not my decision I feel.
AIM: for seasoned investors, I imagine, and I don't qualify.

In my case I employ the two strategies that Gengulphus mentioned i.e. qualifying AIM shares and being married!

It would be reckless to shelter more than a relatively small percentage of your net worth in AIM shares due to their inherent riskiness. And because the beneficial IHT rules around them could easily be withdrawn at any point, meaning that you were invested in them for years or decades for no payoff. So in my case my AIM portfolio is only a few percent of my net worth.

As for marriage, my wife is 13 years younger than me and so statistically that should be effective, although of course you never know. There was a recent topic that somewhat whimsically discussed some deathbed IHT planning options around marrying your beneficiary:

https://lemonfool.co.uk/viewtopic.php?f=49&t=27450

Another strategy is gifts from capital, which you obviously know about. I gave my children about 150 grand each to buy their first homes. That was effectively an advance on their inheritance and, in about 18 months should I not expire, those transfers will become exempt from IHT. I may then repeat them depending on how I am feeling at the time.

Finally my wife and I may move overseas when she retires. Non-residency does not automatically remove a UK IHT liability and may incur a similar liability in the other country. But such a relocation of oneself and one's assets can reduce the practical probability of paying UK IHT, especially if you assume foreign citizenship and thereby lose UK domicile.

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Re: Does this Qualify as Capital Expenditure

#394917

Postby PinkDalek » March 12th, 2021, 1:47 pm

Gengulphus wrote:... Just how many years, I'm not certain, but for large, infrequent items of expenditure such as buying a new car, I feel it would be reasonable to look at how long a car tends to last you and average over that number of years or fewer. (Fewer is better from the point of view of giving your executor(s) an easier case to argue with HMRC.)


Late to this and an interesting read as ever.

That having been said, may I direct you to an earlier discussion on the subject of cars and as to whether or not they can be excluded from the IHT403 table in their entirety (depending on the regularity of replacement).

viewtopic.php?p=45452#p45452

If they do not have to be so reflected then I don't really understand your other comments re ... so I would also feel that averaging it over many years would be justifiable, albeit you were talking about other types of "Capital Expenditure" (using the OP's wording and I'm not saying what he's listed can be excluded anyway).

I'm deliberately not quoting you in full, for brevity, but I've always been under the impression the relevant IHT403 table on page 8 https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/917890/IHT403-05-20.pdf is akin to a cash flow statement.

Thus, for instance, it mentions Income Tax paid and not Income Tax payable in respect of the tax year. It doesn't appear to be a place for accruals and prepayments to be considered and I don't think your averaging suggestion really fits the bill, although I fully understand and appreciate what you are saying, not least re seeking professional advice as appropriate.

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Re: Does this Qualify as Capital Expenditure

#395133

Postby Gengulphus » March 13th, 2021, 9:34 am

PinkDalek wrote:If they do not have to be so reflected then I don't really understand your other comments re ... so I would also feel that averaging it over many years would be justifiable, albeit you were talking about other types of "Capital Expenditure" (using the OP's wording and I'm not saying what he's listed can be excluded anyway).

Thanks for pointing that out. I think I used the wrong verb there - I should probably have said "might be justifiable" rather than "would be justifiable". Or I could have said something along the lines of "it would be possible to make a case for averaging it over many years" without the implication that that case would succeed which is carried by saying that it "would be justifiable".

Gengulphus

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Re: Does this Qualify as Capital Expenditure

#395145

Postby scrumpyjack » March 13th, 2021, 10:04 am

Don't forget that you can also consider the other possibility that some of your gifts are for family maintenance and so are not considered PETs. These gifts do not need to be justified as being 'out of income' to be exempt from IHT

"Gifts made for the maintenance of family members (i.e. spouse/civil partner, minor children, children in full time education and relatives financially dependent on the person making the gift) are not treated as transfers for IHT purposes so no liability will arise."
https://www.wrighthassall.co.uk/knowled ... ll%20arise.

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Re: Does this Qualify as Capital Expenditure

#395195

Postby PinkDalek » March 13th, 2021, 12:43 pm

scrumpyjack wrote:Don't forget that you can also consider the other possibility that some of your gifts are for family maintenance and so are not considered PETs. These gifts do not need to be justified as being 'out of income' to be exempt from IHT

"Gifts made for the maintenance ...


The extract from the link you provided commences with "Maintenance. Although not strictly an exemption, gifts made for the maintenance ...".

I believe they fall under "A disposition (IHTM04023) is not a transfer of value (IHTM04024) if it satisfies two conditions ..." from https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm04177, also see https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm04023, and in particular >>>:

IHTM04172 - Dispositions for the maintenance of the transferor's family: definitions
https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm04172

That having been said, might not such payments need to be included within "Expenditure" of some type when looking at page 8 here https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/917890/IHT403-05-20.pdf, maybe even under the "Other" sub heading?

In other words, they may not be transfers of value but might they not be needed to be taken into account when looking at the overall picture reflected in that page 8 IHT403 table?

I don't know the answer!

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Re: Does this Qualify as Capital Expenditure

#395206

Postby scrumpyjack » March 13th, 2021, 1:14 pm

PinkDalek wrote:
scrumpyjack wrote:Don't forget that you can also consider the other possibility that some of your gifts are for family maintenance and so are not considered PETs. These gifts do not need to be justified as being 'out of income' to be exempt from IHT

"Gifts made for the maintenance ...


The extract from the link you provided commences with "Maintenance. Although not strictly an exemption, gifts made for the maintenance ...".

I believe they fall under "A disposition (IHTM04023) is not a transfer of value (IHTM04024) if it satisfies two conditions ..." from https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm04177, also see https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm04023, and in particular >>>:

IHTM04172 - Dispositions for the maintenance of the transferor's family: definitions
https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm04172

That having been said, might not such payments need to be included within "Expenditure" of some type when looking at page 8 here https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/917890/IHT403-05-20.pdf, maybe even under the "Other" sub heading?

In other words, they may not be transfers of value but might they not be needed to be taken into account when looking at the overall picture reflected in that page 8 IHT403 table?

I don't know the answer!


Nor do I, but I don't see why grandparents should not pay for things for their grandchildren (eg school fees) out of capital rather than income, in which case it would not need to be taken into account in determining how much is available for gifts out of income.

All I can suggest is documenting what you do, so your executor's job, if you don't last 7 years, is as easy as it can be!

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Re: Does this Qualify as Capital Expenditure

#395257

Postby Lootman » March 13th, 2021, 3:12 pm

scrumpyjack wrote:Don't forget that you can also consider the other possibility that some of your gifts are for family maintenance and so are not considered PETs. These gifts do not need to be justified as being 'out of income' to be exempt from IHT

"Gifts made for the maintenance of family members (i.e. spouse/civil partner, minor children, children in full time education and relatives financially dependent on the person making the gift) are not treated as transfers for IHT purposes so no liability will arise."
https://www.wrighthassall.co.uk/knowled ... ll%20arise.

Yes, I have generally taken the view that basic acts of support and generosity for immediate family members (parents, spouse, children, grandchildren) do not fall into either the "gifts from income" category nor the "gifts from capital" PET category. As such they are not recorded and so would not form part of the valuation of the estate performed by my executors.

So for instance if I go to a restaurant with one of my adult children, I typically pay for the entire meal, but certainly do not regard that as a "gift". And indeed, I get something in return - the pleasure of their company. The gifts that I have recorded have two features: They are of significant value and they are made in cash or equivalent. Small items of day-to-day expenditure are deemed to be excluded.

I think if any overly-diligent executor decided that they wanted to scrutinise every transaction I made over a period of 7 years to assess such items, they would drown in the task.


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