Man has died setting up a Discretionary Trust over his half share of a second property ie a holiday home used by the family. He appoints the adult children as trustees and beneficiaries alongside their issue.
The widow and owner of the other half of the property wishes to gift money to the trustees of this Trust she is considering making gifts out of surplus income by direct debit of approximately £1,000 per month.
Has anyone successfully claimed gifts out of surplus income into a trust ?
It is important to keep records to be able to prove to HMRC that there is
sufficient surplus income.
I would also advise:
Rather than looking to claim relief after death instead regularly advising
HMRC of gifts & requesting confirmation they accept relief.
Preparing & retaining a letter from widow to trustees explaining she has
income in excess of her needs and that she intends to make regular gifts of
surplus income.
Rather than making payments by direct debit making them by cheque.
Preparing & retaining a letter from widow to trustees, referring back to
earlier intention letter, advising them that enclosed cheque is a further
payment out of surplus income every time she makes a further payment.
Retaining surplus income in a current account prior to payment instead of
keeping it in a deposit account as I understand HMRC have been known to
contend that once income has been placed on deposit it becomes capital!
Whilst many individuals settle surplus income under s.21 IHTA 1984, I wonder why it is proposed I this instance the monies be settled into the will trust. This will result I a joint settlement and can lead to administrative complexities, especially if any of the monies settled by the widow are used in the maintenance or improvement of the property. This will be so whether the widow is the surviving co-owner and/or a member of the discretionary class.
If a member of the class of discretionary objects, will not the gifts by the widow be caught by the gift with reservation rules.
If a co-owner, in addition to potentially having to apportion the value of any work on the property between the joint settlors, it may be open to HMRC to argue that there is a gift with reservation as the funds could be used for the property, thus giving her a potential benefit.
I suggest that if the widow wants to settle her surplus income, she makes a new settlement, separate from her deceased’s will trust even if the terms of the trust may be the same/similar.
Three basic requirements have to be satisfied for HMRC to accept IHT exempt status. Payments must be made out of excess income and not capital and as part of normal expenditure - indeed that a pattern of giving is established or a deed of covenant set up to show intent. Documentary evidence of the source and purpose of the monies helps but I don’t see why in this day and age a cheque is really necessary? there is no guidance as to whether irregular large purchases eg a car (funded from capital) count as normal expenditure or whether a depreciation value should be included in the annual records that need to maintained to demonstrate excess income.