I am dealing with an estate where it is clear that in certain tax years predating the deceased’s death there was sufficient surplus income to cover the gifts which the deceased made. However, in other tax years, whilst it is clear that there is some surplus income, there is not sufficient surplus income to cover all of the gifts.
I have taken the view that if there is insufficient surplus income to cover all of the gifts, then the gifts must be out of capital. However, I am now doubting myself.
Surely it is an all or nothing situation in that, either there is sufficient surplus income to cover all of the gifts (in that tax year), or there is not, in which case the gifts in that same tax year cannot qualify for this exemption.
Similarly, if in one tax years there was insufficient surplus income to cover the gifts, but there was sufficient surplus income in the following tax year, that the gifts made in the previous tax year cannot qualify for this exemption because, in that tax year, there was insufficient surplus income.
I don’t see why in any tax year there can’t be some gifts made out of income and some out of capital, but there has to be some sort of pattern for the income exemption, so it will depend on the exact circumstances as to which gifts qualify and how best to claim/allocate the exemption.
Also, HMRC do allow you to look back a year or two to see if there is excess income from previous years from which the gifts might be made. See IHTM14250.
The s21 exemption for gifts from surplus income can be used with the annual exempt allowance s19 where there’s insufficient surplus income to cover the regular gifts. It is worth reviewing the cheque stubs for 7/8 years to death to separate out gifts to charity s23 & small gifts totalling no more than £250 per person per year s20. Separately categorising gifts this way helps reduce any IHT otherwise payable on death & makes completion of IHT403 page 3 simpler.
It seems you may seek to apply the IHTA 1984 s.21 gift exemption. This applies applies where:
(a) it was made as part of the normal expenditure of the transferor, and
(b) (taking one year with another) it was made out of income, and
(c ) after allowing for all transfers of value forming part of normal expenditure, the transferor was left with sufficient income to maintain his usual standard of living.
It is generally accepted that “part” of a gift is capable of being made out of income. In the circumstances you describe, it seems that there is scope for you to claim the application of the exemption to “part” of the gifts to the extent they are normal and (partly) out of income.
The words “taking one year with another” can be helpful. HMRC will usually accept that surplus income not gifted in one tax year continues to retain its nature as income in the following tax year, available to set against gifts made in that tax year. There are cases where surplus income not gifted has retained its nature of income for longer still. Although you may carry ungifted surplus income forward, I am personally doubtful that you could carry it back.
I’d await further input but hope your question will be met with some promise for a claim.
As an addition to this question - can you use s.20 Small gifts exemption alongside gifts out of income or is it a blanket no if the donee receives more than £250 in any one tax year?