Inheritance Tax - Useful 'Financial Gifts' articles

[Itsallaguess]

‎
The Telegraph have recently had a number of articles related to Inheritance Tax, and how financial 'gifts from surplus income' can often be made within the current rules without necessarily having to pay any additional tax, so I thought it would be worth capturing those articles here in one thread -

How to give your children unlimited amounts – and never pay inheritance tax - https://archive.is/vEcgO

How to record financial gifts (and avoid an inheritance tax nightmare) - https://archive.is/9z9Sk

Dodge inheritance tax with unlimited gifting: Your questions answered - https://archive.is/vHNKu

As mentioned a number of times in the above articles, good long-term record-keeping seems to be essential in being able to prove that carrying out any such 'financial gifting' is or has been 'out of your own surplus income', and HMRC provide Schedule IHT403 to help record both financial gifts made and also helps to identify the types of recorded regular outgoings that they're interested in seeing, to help build a 'surplus income' case, and a copy of that IHT403 form can be found in the following link -

https://assets.publishing.service.gov.uk/media/5f60b44cd3bf7f7234487bf0/IHT403-05-20.pdf

Cheers,

Itsallaguess

[DrFfybes]

Good to see it so concisely, even if I *think* I learnt little.

I am confused though.......

How to claim the tax break
Clearly, you need strong evidence in order to claim the exemption. It is the executors who will have to claim it when they come to fill in the IHT forms.

IIRC on mum's form's I did not have to 'claim' anything - I just stated that no gifts above the allowances had been made. The 'records' in this case would have been all her bank statements whih she lovingly filed away every month

Paul

[Lootman]

Good to see it so concisely, even if I *think* I learnt little.

I am confused though.......

How to claim the tax break
Clearly, you need strong evidence in order to claim the exemption. It is the executors who will have to claim it when they come to fill in the IHT forms.

IIRC on mum's form's I did not have to 'claim' anything - I just stated that no gifts above the allowances had been made. The 'records' in this case would have been all her bank statements which she lovingly filed away every month

Same here. Any gifts that are not taxable, either because they were more than 7 years prior or because they were "regular gifts from income" are simply not reported.

In the unlikely event that the taxman asks about them, then you have the documents to back up your position.

Including information that is not required or taxable just seems like adding complexity and inviting trouble and scrutiny.

[Laughton]

Thanks for starting this thread. As I get older the subject seems to become more interesting, as I'm sure it does for others.

One bugbear for me - the Daily Telegraph article shows a nice table:-

Rate of inheritance tax paid on gifts, in the event of the donor's death:

Years before death that the gift was made

Rate of tax on the gift
0-3 years 40pc
3-4 years 32pc
4-5 years 24pc
5-6 years 16pc
6-7 years 8pc
7 years or more 0pc

which I took at "face" value for quite some time and many, including me, didn't realise that, for example, if I gift 100,000 (or any amount below £325,000), have a remaining estate valued in excess of £325,000 and die up to 7 years later then there is no real taper relief.

And a question which hopefully someone will know the answer to:

Regular gifts out of income are not subject to IHT; that's OK but what is the situation if I have been making regular gifts to my children of £250 per month each out of income but then decide to increase that amout to £600 (or any other increased amount) per month but die after only a few months (well, less than 3-4 years anyway)? So long as the amounts can be shown to be out of income and not have diminished my standard of living, would the new, higher amounts be allowed?

Maybe Mr Hunt will do away with IHT in which case the above may be irrelevant.

[scrumpyjack]

As I recall you only need to have made a payment twice for it potentially to be considered normal expenditure out of income. Also it does not necessarily have to be covered by the income of the year in which paid, as long as 'taking one year with another' the gifts are covered by surplus income. I would have thought going from 200 to 600 would be fine. I have made much larger monthly payments by standing order to my daughter for years, with substantial increases when I feel generous. I think doing it by standing order helps the case that it is normal and out of income. It demonstrates an intention of regularity.

[scrumpyjack]

On the question of which gifts have to be reported by the executor to HMRC, I am unclear.

We are told: "Executors are under a duty to disclose to HMRC any gifts that the deceased person made in the 7 years before their death. A failure to do so can lead to HMRC issuing penalties of up to 100% of the amount of the tax payable on that gift."

It does not say you don't need to disclose anything covered by an exemption, though that could lead to the ludicrous position of reporting everything no matter how small, even though covered by the £250 exemption.

Of course the executor could take the view they won't report gifts out of income because, as long as they can prove it if HMRC challenge this, the penalty for non reporting would be zero!

[Lootman]

It does not say you don't need to disclose anything covered by an exemption, though that could lead to the ludicrous position of reporting everything no matter how small, even though covered by the £250 exemption.

Of course the executor could take the view they won't report gifts out of income because, as long as they can prove it if HMRC challenge this, the penalty for non reporting would be zero!

I think there is a more general principle that if an item or event is not taxable, then it is not reportable. So for example ISAs, premium bond wins, gains on gilts, gains under the nil-rate band (with proceeds under £50,000) and so on are ignored. And in the extreme case, if you owe no tax in a year you should not need to file a SA return at all.

If an exception to that rule is the case then that must be published in the rules. If no exception is noted then the assumption has to be that you do not report it.

One exception I vaguely recall is with the rent-a-room scheme. IIRC you have to declare that rent even though it is not taxable. But with stale or otherwise exempt gifts, I see no instruction for executors to report them. And I would not unless there was a suspicion that a benefit has been retained/reserved by the gift donor.

[stevensfo]

It does not say you don't need to disclose anything covered by an exemption, though that could lead to the ludicrous position of reporting everything no matter how small, even though covered by the £250 exemption.

Of course the executor could take the view they won't report gifts out of income because, as long as they can prove it if HMRC challenge this, the penalty for non reporting would be zero!

I think there is a more general principle that if an item or event is not taxable, then it is not reportable. So for example ISAs, premium bond wins, gains on gilts, gains under the nil-rate band (with proceeds under £50,000) and so on are ignored. And in the extreme case, if you owe no tax in a year you should not need to file a SA return at all.

If an exception to that rule is the case then that must be published in the rules. If no exception is noted then the assumption has to be that you do not report it.

One exception I vaguely recall is with the rent-a-room scheme. IIRC you have to declare that rent even though it is not taxable. But with stale or otherwise exempt gifts, I see no instruction for executors to report them. And I would not unless there was a suspicion that a benefit has been retained/reserved by the gift donor.

One exception I vaguely recall is with the rent-a-room scheme. IIRC you have to declare that rent even though it is not taxable.

Crikey, is that still going? I knew someone years ago who did it and they said that HMRC were very strict about reporting the rent, so that he could then be judged exempt from tax on it, but also be 'investigated' if they thought there was anything fishy going on. The idea was the lodger had a room and lived in the house, whereas some house owners converted extensions into makeshift 'granny flats' for the lodger, giving them all more privacy. Apparently HMRC didn't like this idea, though not sure what the problem was.

Steve

[mutantpoodle]

I would strongly recommend that anyone thinking to do 'regular gifts from income should take a close look at IHT 403
which is required to be completed in line with the usual IHT 400

it requires much detail,,,income, expenses, holiday cost, insurances etc etc
all to clearly show that the gifts were 'affordable' from income

obviously its no problem if income is huge...but its a lot of extar work for executors if income not so huge

tracking even ordinary expoenses is no mean feat for executors...seeking insurances/holiday and so on wouod be a noghtmare

I looked into this a month ago and decided that even for me while alive...keeping those extra details would be an effort!

it put me off

[Moosehoosenew]

So something I did not realise is that there is no taper relief on gifts below 325k if estate exceeds 325k, so if this method of gifting is used has been used, ideally you need to hang on for 7 years?


Additionally anyone know if interest payments count as income for regular smaller amount gifting?

and yes IHT becoming more interesting as we get older.

thanks

[scrumpyjack]

I would strongly recommend that anyone thinking to do 'regular gifts from income should take a close look at IHT 403
which is required to be completed in line with the usual IHT 400

it requires much detail,,,income, expenses, holiday cost, insurances etc etc
all to clearly show that the gifts were 'affordable' from income

obviously its no problem if income is huge...but its a lot of extar work for executors if income not so huge

tracking even ordinary expoenses is no mean feat for executors...seeking insurances/holiday and so on wouod be a noghtmare

I looked into this a month ago and decided that even for me while alive...keeping those extra details would be an effort!

it put me off

The form itself says that these headings are 'a guide' to the sort of things that should be included. I don't believe you need to categorise everything precisely as they say. I keep spreadsheets of my bank account movements and a summary in a form which clearly proves that gifts are out of surplus income. This would include the total credit card spending each month (I pay it all off each month) and all is treated as expenditure - I don't bother analysing it further. It really isn't much trouble and I do it anyway to keep my finances in order.

[MyNameIsUrl]

I would strongly recommend that anyone thinking to do 'regular gifts from income should take a close look at IHT 403
which is required to be completed in line with the usual IHT 400

it requires much detail,,,income, expenses, holiday cost, insurances etc etc
all to clearly show that the gifts were 'affordable' from income

obviously its no problem if income is huge...but its a lot of extar work for executors if income not so huge

tracking even ordinary expoenses is no mean feat for executors...seeking insurances/holiday and so on wouod be a noghtmare

I looked into this a month ago and decided that even for me while alive...keeping those extra details would be an effort!

it put me off

It puts me off for the same reason - my income is not so huge that the amounts I could give would be worth the effort. However, as an anecdote to show that not everyone thinks the same way, a few years ago I met a chap who was adamant he could give away all his income under this provision. When I asked him what he would live on, he explained he would just withdraw from his capital.

[Laughton]

So something I did not realise is that there is no taper relief on gifts below 325k if estate exceeds 325k, so if this method of gifting is used has been used, ideally you need to hang on for 7 years?

Actually I think it's even worse than I first posted (post in haste/make things more confusing). Die within 7 years and the gift is added back into your remaining estate so "remaining estate" can be a lot less than £325k and you still get hit. Within 7 years and the gift is used to reduce your IHT free allowance (hope that makes some kind of sense).

Taper Relief still of use to those with enough dosh to gift huge amounts of money (in excess of £325,000).

Not always easy to get my head around all the nuances - so have decided to stick it out for at least another 13 months

[UnclePhilip]

The form itself says that these headings are 'a guide' to the sort of things that should be included. I don't believe you need to categorise everything precisely as they say.....

This is quite right, of course, as a brief look at IHT403 shows. However, due to the various posts in this thread about whether you need to detail gifts out of income, it's important to note that all such gifts, and the details of income/expenditure, are required on the form.

Now, it can be argued that that's unreasonable, and/or that it is insufficiently backed up by legislation, and/or that trivial (define?) sums cannot be expected; but the form requires the information.

It's also important to note on IHT403 that you're not to allow for taper relief; and, due to the complex IHT rules which I haven't the will to start explaining here (but with which I had to familiarise myself not so long ago), various transfers of value in the period between 7 and 14 years before death are also required to be entered.

As to the consequences of not declaring such gifts; well, they range from negligible to very painful, depending on the particular facts at issue, and how interested HMRC are at the time....

[scrumpyjack]

As to the consequences of not declaring such gifts; well, they range from negligible to very painful, depending on the particular facts at issue, and how interested HMRC are at the time....

As I mentioned earlier, I understand the maximum penalty for non disclosure is 100% of the tax due. So as long as the gifts were genuinely out of income and can be clearly demonstrated to be, there is no tax to pay and so no penalty? (Of course the prudent executor would fill in 403 so as not to antagonise HMRC)

[scrumpyjack]

https://www.mandg.com/pru/adviser/en-gb ... -exemption

This is a useful article by the Pru/M & G on the issue.

It is noteworthy that they say you do not need to itemise income and expenditure in the form laid out in IHT403 but can use a separate schedule.

"Details of the deceased’s income and expenditure should be provided to HMRC using page 8 of form IHT403 (alternatively, a separate schedule can be provided)."

[SebsCat]

As to the consequences of not declaring such gifts; well, they range from negligible to very painful, depending on the particular facts at issue, and how interested HMRC are at the time....

As I mentioned earlier, I understand the maximum penalty for non disclosure is 100% of the tax due. So as long as the gifts were genuinely out of income and can be clearly demonstrated to be, there is no tax to pay and so no penalty? (Of course the prudent executor would fill in 403 so as not to antagonise HMRC)

I would be interested to see if there is any case law on this. If I were HMRC, I might say that gifts are potentially exempt transfers and it is up to the executor to claim the exemption. If he/she has not done so then the gifts are not exempt and therefore liable to IHT (and therefore the executor to penalties).

[Gerry557]

I might set up a company that does 7 year cruises that are off grid and your loved one can be reported deceased on the last day. You can book your fridge, sorry cabin with or without balcony

Keeping notes and records to help executors will be useful. How many do it though?

I suppose it depends on how well the executor knows the deceased and their spending habits. Looking through bank statements and finding payments for say a garage or mothercare when the person didn't drive and was male. Are these gifts?

What about payments to Tesco were there gifts within the spending. Possibly but how detailed do you need to get. Big lump sums might be easier to identify and trace.

I suppose the tax man is after those trying to hide large amounts over the years rather than grandad helping a family member get a car through an mot or buying a new pram.

[Lootman]

As I mentioned earlier, I understand the maximum penalty for non disclosure is 100% of the tax due. So as long as the gifts were genuinely out of income and can be clearly demonstrated to be, there is no tax to pay and so no penalty? (Of course the prudent executor would fill in 403 so as not to antagonise HMRC)

I would be interested to see if there is any case law on this. If I were HMRC, I might say that gifts are potentially exempt transfers and it is up to the executor to claim the exemption. If he/she has not done so then the gifts are not exempt and therefore liable to IHT (and therefore the executor to penalties).

But the other way to look at it is that if the executor believes a gift is exempt (for whatever reason) then it is excluded from reporting. In much the same way as a gift from capital that is more than 7 years old is excluded. You don't include a 10 year old gift from capital on the form and then claim an exemption. Rather you quite simply ignore it as if it never happened.

But as with anything the executor must have solid grounds for the decision.

[scrumpyjack]

I would be interested to see if there is any case law on this. If I were HMRC, I might say that gifts are potentially exempt transfers and it is up to the executor to claim the exemption. If he/she has not done so then the gifts are not exempt and therefore liable to IHT (and therefore the executor to penalties).

But the other way to look at it is that if the executor believes a gift is exempt (for whatever reason) then it is excluded from reporting. In much the same way as a gift from capital that is more than 7 years old is excluded. You don't include a 10 year old gift from capital on the form and then claim an exemption. Rather you quite simply ignore it as if it never happened.

But as with anything the executor must have solid grounds for the decision.

Well looking at the form, HMRC clearly are of the view that any gift made within 7 years of death (apart from those covered by the £3,000 and £250 exemptions) must be reported and a claim for exemption made. So, in their view at least, it is not the same as an older gift exempted by the 7 year rule. I take the point of another poster who suggested you don't get this exemption unless you claim it! So non reporting could be risky.