[I am not an accountant, although I help a small business with their accounts, hence my use of Accounting Web. This question is about my own Inheritance Tax planning - I hope it's in order.]
I am acquainted with the rules on Regular Gifts from Income being exempt from IHT if there is documentary proof of intent and a breakdown of past income and expenditure as per IHT403. I just want to clarify how gifts made jointly by a couple who jointly share income and outgoings should be deemed to be apportioned when one of them dies.
To take a fictitious example.... John earns £36,000 (net) and his wife Mary earns £12,000 (net), total £48,000. They pool their income. Regular annual expenditure of £40,000 to maintain their lifestyle is made from their joint account. So they have an £8,000 annual surplus between them, £4,000 of which they pay into a Child ISA for their grandson. They consider this £4,000 to be a "joint gift from us both" and it is made as a single payment from the joint account.
Note that the annual expenditure of £40,000 is not affordable by either spouse alone. Nor does Mary's own income cover 50% of the annual expenditure.
Mary dies, and her executor has to fill out an IHT403, which requires you to show, for the relevant years, the Deceased's annual Expenditure / Income / Gifts (not the combined household Expenditure / Income / Gifts).
There are two ways to present the figures in this fictitious couple's case:
1) 50/50 apportionment: John & Mary pool their income, so John effectively transfers some of his income to Mary such that they have an effective income of £24,000 each, regular expenditure of £20,000 each, and an annual surplus of £4,000 each. They make an annual Gift for Income of £2,000 each to the grandson's Child ISA.
- This is "the way we see it" for many couples, and simplifies record-keeping, but it would presumably be misleading to show Mary's Income as £24,000 on an IHT403, so I don't see how this approach can be taken.
2) Apportionment based on Income percentages: Mary contributes 25% towards their joint pooled income, so logically contributes 25% towards their joint annual expenditure and towards the joint annual gift to the grandson. Thus the IHT403 figures for Mary would be Income £12,000 (the actual figure), Expenditure £10,000 (25%), Annual Gift £1,000 (25%).
- This approach seems to be defensible, but may be over-simplified in the real world. Many couples both contribute to truly 'joint' expenditure via a joint account but separately, with individual accounts, pay for their own clothes, club memberships, commuting costs, etc, so it's not quite as simple as a 50/50 Expenditure split.
Other couples maintain individual bank accounts and agree to pay specific bills (husband pays mortgage and utilities, wife pays groceries and car, etc.) which invites a 3rd approach:
3) Apportionment based on actual contributions to specific lines of Expenditure. This would require very detailed record-keeping and a very confusing IHT403 statement if represented in a literal way.
I can't find any official guidance on this 'apportionment' point. HMRC do at least say that they are not interested in which account regular Gifts From Income are drawn from - it doesn't have to be a 'current account' as long as the Executor can show that there was surplus income to cover it. So it seems they will not get down to the level of "which bank account was used for what".
Any advice welcomed. My wife and I want to start making regular Gifts From Income, and we want to be sure to keep Income and Expenditure records at the right level of detail.