IHT multiple gifts in 7 years pre death

Treatment of multiple gifts in 7 years before death

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My mother has recently passed away. She inherited a significant annual pension from my Dad well in excess of her normal expenditure requirements so she made multiple gifts to her 7 children out of this surplus income for nearly 15 years obviously including the last 7 years of her life. Her probate etc will be handled by a solicitor but I am intrigued to know how gifting out of surplus income works in practice. For example let’s say there was  20000 of  surplus income a year and she gave 10000 one year then 35000 the next then 15000 the next etc do you work things out year by year for the last 7 years to see if over the 7 years she gave away more than her surplus income in total over 7 years or do you work through the 7 years year by year and identify gifts made over and above the surplus income in each year?

Do you also get 3000 a year tax free in addition to the gifts out of surplus income.

As I mentioned the solicitor will prepare the probate but the more we information I can prepare in advance the lower his bill might be!

Replies (17)

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RLI
By lionofludesch
24th Aug 2018 13:38

Yep - gifts out of income don't count towards the £3000 annual allowance (unchanged in over 40 years).

You might struggle to justify the £35000 as a gift out of income, though.

Much depends on the facts as opposed to made up examples.

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By tonycourt
24th Aug 2018 13:52

As you have no doubt surmised it's vital to the correct calculation of IHT that the personal representatives or those acting for them, i.e. the solicitor's are informed about gifts in the seven years (and if there are any CLT's - 14 years) before death.

The legislation (s.21 IHTA) measures the income surplus as " that (taking one year with another) it was made out of his income,". In effect I've always envisaged this as a rolling 24 month period. It's definitely not viewed as a seven year block.

The annual exemption only comes into play if there's a PET that becomes chargeable for any year. For example, if a gift of say £10K did not qualify for s.21 relief and there were no chargeable gifts in the previous year the annual exe4mption of £3,000 plus £3,000 for the year of the gift and the previous one would reduce the failed PET by £6,000. The tax on the failed PET would be payable by beneficiary. If there are multiple beneficiaries of the gifts an apportionment of the IHT would be required. Alternatively the estate would bare the IHT on the grossed up value of the chargeable gifts.

EDIT - WTF! AWeb's wondrous bad language checker has removed the acronym for "chargeable lifetime transfers" . I'll leave you to decide what it though the abusive word was - brilliant a tax forum that doesn't permit a common tax acronym. What bunch of CLTs!

EDIT EDIT - double WTF - it's OK with it now. What a load of c#4p!

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Replying to tonycourt:
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By Portia Nina Levin
24th Aug 2018 13:56

I'd agree with you in relation to s 21. I think it's fair to assume that income from 2 years ago that has not otherwise been spent has become capital.

I think it's also fair to assume that one's living expenses are ordinarily met out of income, rather than capital, and that this would have a bearing on the reasonableness of the £35,000 gift example.

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By arthurallan
24th Aug 2018 16:23

Many thanks for helpful feedback. Very happy to give more precise numbers rather than example numbers
11/12 tax year Excess income 25000 gifts 10,000 evenly across 7 children.
12/13 Excess income 27,000 gifts 48,000 made up of one large gift 24,000 to one child and 24,000 of gifts across 6 children
13/14 28,000 excess income one large gift of 30,000 to one child and 24,000 of gifts across 6 children
14/15 30,000 excess income 21,000 gifts across 7 children
15/16 31,000 excess income 20,000 gift to one child 18,000 gifts across 6 children
16/17 33,000 excess income 28,000 gifts across 7 children
17/18 35,000 excess income 28,000 gifts across 7 children.
The excess income increased each year because the pension had a very generous uplift each year (an annual annuity was first drawn in 1986 and it increased each year thereafter) and Mums expenditure fell each year as her activity declined.

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By arthurallan
24th Aug 2018 16:24

Oh and sorry she passed away just over a week ago so August 2018

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Jane
By Jane Evans
26th Aug 2018 17:48

I have done lots of IHT gifts out of income forms IHT403 for my clients, and none have been challenged so far.

I recommend you complete form IHT403 yourself, rather than letting the probate solicitor do it, as they loathe doing this calculation. I have used a spreadsheet substitute for the final schedules and that has worked alright. I have also updated the description of the expenditure eg I have included a category called credit card expenditure, rather than analysing it.

Ensure you include the tax-free income eg ISA income, attendance allowance, winter fuel allowance etc in the calculation of income.

From the information you have provided I would describe it all as gifts out of income, except
12/13 large gift of £24k
13/14 large gift £30k
15/16 large gift £20k
I would call these three capital. Then allocate the £3,000 annual allowance and b/f annual allowance if available.

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By arthurallan
26th Aug 2018 20:19

Thank you Jane that’s very helpful advice
Most of my work is small Ltd Company accounts and VAT returns and sole trader accounts and generally so say no to IHT work but as this is my Mums stuff the more I can do on it the better!

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By hiu612
29th Aug 2018 10:57

Tend to largely agree with Jane. Take a look at HMRC's manuals on the topic. They're all about a settled pattern of gifting and considering anything so large / unusual as to disrupt that settled pattern as a standalone item. Worth remembering though (and HMRC's manuals cover this) that the exemption can cover part of a gift. So in 12-13, for example, you might well take £3,000 (or even a bit more) of the one off £24k as a gift out of income, then use the annual exemption / bfwd, so as to shelter perhaps £9k or more of it.

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By adjadj
29th Aug 2018 19:32

I have had to handle this twice in the last couple of years in my role as joint executor with a solicitor. I produced the IHT203 schedules which were used by the solicitor.

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By cfield
29th Aug 2018 20:08

I think you're focusing too much on the surplus income aspect and overlooking the other requirement for s21 to apply - i.e. that the gift must have been made as part of the "normal expenditure" of the transferor.

In the words of J Lightman in Bennett & Others v IR Commissioners 1995, a gift must accord with "the settled pattern of expenditure adopted by the transferor" in order for s21 to apply.

In practice, this means that large gifts of cash must either be frequent enough to be habitual or relate to a special occasion such as a wedding, birth or graduation that the deceased had a stated intention, preferably made contemporaneously in writing, to mark with a larger than normal gift. If such an intention existed, then even a single large gift would qualify so long as it would have repeated on a similar occasion in future had death not intervened.

Otherwise, there is a risk that it may not be accepted as part of her normal expenditure but treated instead as a special one-off gift, which would not qualify for s21.

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By pauljohnston
30th Aug 2018 14:28

I dont necessarily agree with cfield. But do agree with Jane Evans. Just because it is one payment there could be an argument that one part is a regular payment of income and the other a capital distribution.

HMRC are very aware that if it looses in tribunal that it could set a precent. So do the IHT403. If I recall correctly this does not capitalise income but rolls forward the excess.

The bottom line is that if you dont claim it as a gift from income you will never get HMRC to suggest it. If yu are nervous about any amount declare it by letter as well as in the IHT403.

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Replying to pauljohnston:
By cfield
30th Aug 2018 14:59

It's got nothing to do with capital/income splits or IHT403 and nobody is expecting HMRC to suggest anything.

It's got all to do with the legislation and what does and doesn't qualify for s21. Transfers of value that aren't normal expenditure don't qualify full stop. You can chance your arm by putting them on page 6 rather than page 2 of IHT403 but as an executor you run the risk of footing the tax bill yourself if you get it wrong, letter or no letter.

HMRC have already lost in court on normal expenditure and set a precedent in the Bennett case. It doesn't mean everyone will be able to take advantage of that leeway. It still needs to accord to a settled pattern of expenditure. If you have something in writing, then fine. Otherwise, tread carefully.

Sorry to be a pedant, but please please will everyone out there stop spelling "loses" as "looses". You see it so often now and it makes you lose (not loose) the will to live.

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Replying to cfield:
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By tonycourt
30th Aug 2018 17:29

@Cfield
I don't fully follow what you're getting at and how it's distinguished from previous posts.

For the record my understanding of s.21 and the precedent set in Bennett is that the gifts must be part of normal expenditure, i.e. de facto habitual (the payments listed by the OP appear to be that); or (by virtue of Bennett) in keeping with an intention to make such payments regardless that whether a sufficient number of gifts have been made to prove the intention.

The skipping of a year or the failure of a gift to meet the conditions of s.21 (because it was say, excessive), would not prevent the exemption apply to those gifts that occur immediately before or after the hiatus.

If a donor made gifts without any intention or knowledge of the s.21 exemption it would not prevent the exemption from applying to those gifts.

Don't forget s.21 simply prevents gifts being brought into charge as failed PETs. Therefore, that if acting as PR for an estate you identify recurring cash gifts over a few years or more (without any indication that the donor intended to make use of s.21) you should claim the exemption if it appears to you that they were made out of income. Not to do so would be failing the beneficiaries.

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Replying to tonycourt:
By cfield
30th Aug 2018 19:06

I totally agree with you on all these points except your apparent conclusion that the payments listed by the OP appear to be habitual or in keeping with an established intention. I don't think we can say that for sure on the larger ones, not without further information anyway.

For instance, there was a large gift of £24k to one child in 2012/13, £30k to one child in 2013/14 and £20k to one child in 2015/16. These stick out like a sore thumb from the other gifts which were shared between all 7 children.

They might well have been part of a settled pattern of gifting but we don't know without some insight into the motivations behind them. They might just as easily have been one-off gifts on the spur of the moment, to fund a business or buy a new house for example, rather than a documented intention to make inordinately large gifts to individual children on certain occasions.

All I'm saying is that surplus income is not the only prerequisite. We can't just assume they are all normal without further enquiry.

The £30k in 2013/14 is well over excess income anyway. The £24k in 2012/13 would qualify taking one year with the next after deducting annual exemption. The £20k in 2015/16 would qualify for that year alone after deducting the annual exemption and £250 per person small gifts exemption (assuming they're not for the same person).

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Replying to cfield:
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By Tax Dragon
30th Aug 2018 23:17

I agree with a lot of what you are saying (and looking at IHTM14244, you'd be forgiven for thinking HMRC had won Bennett). As you said before though, either a gift is covered by s21 or it is not. You don't knock AE tax off a ToV and then ask whether the balance isn't a ToV thanks to s21.

As to the patern of giving, we have been given a partial summary of 7 years of the history; it would be appropriate for the OP to provide the full 15-year history of giving to the solicitor and to do so in more detail than we've been given here.

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Replying to cfield:
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By Tax Dragon
30th Aug 2018 23:30

Apologies if I read your comment more carefully I agree with it more fully - ignore my last (to the extent that it's wrong). It's late, I'm tired. It's been a loooong day. I'm going to bed.

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By C.Y.Nical
31st Aug 2018 16:29

May I ask a question? I noticed that 'The tax on the failed PET would be payable by beneficiary' and I've heard that elsewhere, but I can't find it in the legislation. Probably I'm not looking in the right place. What happens if a PET is made, quite a large one (and not a gift out of surplus income), and the beneficiary says "Thanks very much" and spends it without having any reason to think about IHT, and then the donor dies within 7 years? Presumably in 99 cases out of a hundred the estate pays the IHT but what happens if the estate doesn't have the funds? Can HMRC demand the IHT from the beneficiary (who, as explained, doesn't have the money any longer)? What happens if the beneficiary is a foreign national? I really would like to read the primary legislation on this and I simply can't find it.

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