IHT - gifts from surplus income

Repost as hoping now January over someone may have time to comment

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Background info - I’m ACCA but medically retired due to disability. I’ve been asked by my MIL to help with IHT planning and I’ve not really used my training on this area for a few decades so I’m a bit rusty! One area we’d like to explore is ‘gifts from surplus income’. We’ve completed an income vs expenses sheet for the past few years - and will carry on going forwards- to prove that there is surplus income and to prove that any gifts won’t affect her standard of living. We will show that the gifts are given from that net surplus . I’ve also advised her the gifts need to be regular -be it monthly/quarterly/annually whatever. 

 

My questions - have I missed anything? Does it matter that the income she receives is largely from capital investments (ISA/bond interest mainly) half of which she herself received as an inheritance from her husband? 

Thanks all for any comments 

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By David Ex
05th Feb 2024 15:21
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By Tree63
05th Feb 2024 15:36

Thank you. That’s exactly what we have been doing as I had reviewed this previously. I can’t find anything anywhere to suggest that it matters if the income is from investments given as to my MIL as part of her late husbands estate. Does it matter what the original source of the income was?

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By David Ex
05th Feb 2024 15:44

Tree63 wrote:

Does it matter what the original source of the income was?

I don’t know for certain but I’d be very surprised and the form makes no reference to that. The amount inherited from the husband presumably becomes the widow’s property unconditionally.

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By Tree63
05th Feb 2024 15:53

Thank you. It would surprise me too but it was one of those areas where I don’t have much practical experience and reading up couldn’t find anything specifically mentioned. So the old saying ‘you don’t know what you don’t know’ could be very much applicable to me! Yes it is her property unconditionally.

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By DJKL
05th Feb 2024 16:47

It cannot surely have a bearing, assets held earning income could over years have likely been sold, changed, reinvested etc, how might one trace? For instance my mother in law has been widowed for circa 45 years, the only asset inherited from her late husband that is still held is 50% of the house, everything else, the liquid assets, has been in and out of bonds, shares, deposit accounts etc over the intervening 45 years.

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By Tree63
05th Feb 2024 16:53

Thank you. It was a point she was specifically worried about so I said I’d double check with the community and appreciate the consensus is pretty much what my initial thoughts were too. But as I said above sometimes you ‘don’t know what you don’t know’.

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paddle steamer
By DJKL
05th Feb 2024 15:34

Insurance Bond withdrawals at 5%, where the underlying bond's capital value is shrinking year on year as a result, might be one area to be careful about.

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By Tree63
05th Feb 2024 15:41

Good thinking I’ll double check but I don’t believe applies in her case

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By FactChecker
05th Feb 2024 16:49

Or to put it another way ... the likelihood of finding explicit guidance on every possible source of income is vanishingly small (unknown unknowns and all that).
But I agree with the wider point I believe DJKL is making ... make sure that ALL the income on your spreadsheet meets the normal definitions of income (as opposed to realised or disposed capital).

One other point ... although HMRC are very fond of quoting the need for the gifts to be "regular", this is regarded by many as unproven (as well as obviously highly dependent on an individual's interpretation of what is meant by 'regular').
I believe there have been many cases where this aspect has been argued (are school fees regular by their nature even if not gifted every term, for instance?)

In my own experience, I've always focussed entirely (as per your spreadsheet) on the 'affordable out of excess income' aspect and ignored the regularity - with no formal comeback from HMRC resulting.

On the only occasion where it was even quietly raised (verbally), I replied with a less detailed version of the spreadsheet - which showed that on average the same recipients were 'regularly' receiving gifts (i.e. most years) albeit as different sums for different purposes and at ad-hoc intervals. This placated HMRC.

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By Tax Dragon
05th Feb 2024 17:30

I believe income is income. Income is not not income just because it is not subject to income tax. Conversely, something that is not income but that is subject to income tax rules (eg concerning CEGs) is not income.

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By Montrose
07th Feb 2024 17:10

The CTO takes a broad view of what constitutes "income" for the purposes of the normal expenditure rule. For example offshore income of a non dom which is not remitted is still income as is the capital element of a purchased annuity.
You have not provided details of what consists M-i-L's income .

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By Tree63
07th Feb 2024 17:27

Thank you - it’s deposit accounts, ISAs and bonds (which I need to check the exact nature of following the helpful reminders above)

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By Montrose
07th Feb 2024 22:15

Apologies. An error crept into my comment. The capital element of a PLA is specifically excluded from the definition of "income". The CTO practice is to say income is as defined as according to normal accounting rules.

Seehttps://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm14250

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By Montrose
07th Feb 2024 22:16

Apologies. An error crept into my comment. The capital element of a PLA is specifically excluded from the definition of "income". The CTO practice is to say income is as defined as according to normal accounting rules.

Seehttps://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm14250

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By penelope pitstop
27th Feb 2024 01:46

I have done quite a few of these over the years and they have survived HMRC scrutiny on the IHT400/IHT403 death forms.

In one of the more complex cases "income" meant all of the net income on the tax return (net of SA income tax liability) plus ISA income plus NS Premium Bond winnings plus (arguably) HMRC repayment interest supplement on income tax overpaid, but excluding life insurance chargeable event gains for income tax purposes (on the basis they are actually capital gains which are deemed to be income tax gains by virtue of some Taxes Act "magic").

When you say "bond interest" be careful you mean bonds which generate income as opposed to bonds which give rise to capital gains. "Bond" can mean numerous things, although from the context of what you say it appears your bonds are yielding genuine interest income.

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