I am calculating the surplus income in respect of a client who has moved into sheltered accommodation and looking at what classes as expenditure. No previous regular gifts have been made but there is an intention going forward for gifts totalling around £2k per month. In this particular year and next year there are also a number of large capital gifts from the sale proceeds of her home to individuals and to charity.
My reading suggests that the capital gifts made to individuals are PETs and would not fall within the calculation of excess income for S21 (1)(c) and this appears to be confirmed by IHTM 14255 which states You should ignore gifts that are not part of the transferor’s normal expenditure and test the condition as if such abnormal gifts have never been made
Using this logic would also suggest you would ignore any large charitable gifts even if they were split into two tax years given this level of gift has not previously been made.
However, the client wishes to claim gift aid on the large charitable donations over the next two years. Claiming gift aid requires there to be sufficient income tax paid to cover the relief being claimed which will be fine. But the inclusion of gift aid has me wondering whether this would alter whether you would include within the normal expenditure computation.
My instinct would be to suggest that these large charity payments are ‘abnormal’ and so do not form part of the normal expenditure out of income computation. But it does feel a bit have your cake and eat it given we are claiming the payments within the income tax comp for higher rate relief.
Did you get to the bottom of this point as I now have a similar situation where the deceased has made significant gifts to charity year on year under Gift Aid to reduce his tax liability as well as regular gifts to the family. I cannot see anything that suggests that when looking at normal gifts his income should be reduced by the charitable gifts but it does seem too generous
S.21(1) IHTA does not mention gifts at all, though subsection (2) does re policy premiums.
The provision is lacking in essential definitions and case law is somewhat limited so HMRC have had some de facto licence in interpreting it. Current judicial fashion is to adopt a purposive or contextual interpretation. I suggest that this would indicate that the target is to identify the transferor’s disposable income and that “expenditure” does not itself include gifts: if it did there would be a hopeless circularity. So I suggest charitable gifts should be deducted from disposable income and not in arriving at it.
There is no prescription as to the identity of the transferee so it could be a charity, although presumably the donor would argue for s23 exemption unless for some reason it did not apply. s23 is not limited to gifts of capital. Both sections apply to a TOV which does not distinguish between transfers out of income or capital as the value transferred and the s21(1)(b) requirement that the transfer be “out of income” does not ordain any tracing mechanism, as HMRC accept, so the gifts can be made from capital provided their amount is within the calculated quantum of disposable income. Page 8 of IHT 403 gives a broad indication of what items HMRC think the calculation should involve.
Like nigelscase, I’d thought the quantum available to make gifts to family members using s21 relief was the surplus income figure calculated as implied by page 8 of IHT403, without deducting any charitable donations listed earlier on IHT403 and exempted by use of the s23 exemption, even if they were recurring. In other words s21 could be used after s23 has removed charitable gifts from the equation.
Just looking at the design of IHT403, one might assume that the gifts figure to enter on the bottom line of page 8 is the sum of those gifts each year that do have s21 selected in the “type of relief” column, so it is only that quantum which is compared year by year with the surplus income calculated on page 8.
But as Jack Harper has pointed out some, but not necessarily all, of the charitable gifts in the 7 years before death should arguably be included as “transfers of value forming part of normal expenditure”.
If that means there is not enough surplus income to cover all of the charitable gifts as well as the family gifts, computational questions arise.
Assume surplus income is 20, regular family gifts are 15 and regular charitable gifts are 10. So regular transfers of value of 5 are in excess of available income.
A pro-rata approach would imply only (20/25) i.e. 80% of the family gifts would be relieved, so 3 is chargeable. But say the charitable donations pre-dated more recently established family gifts. Is the excess of 5 then all attributed to the later family gifts, increasing the IHT due?
I hope I have not set a hare running. In my opinion:
1 s23 exempt gifts do not enter into the s21 income calculation;
2 no gift is ever”expenditure” for s21. The ordinary meaning of this word, since not defined, in context means the incurring of expense non-gratuitously.
3 If a surplus of expenditure is generated by the s21 calculation it cannot be exempt under s23 as s23 eligible expenditure does not enter into the calculation in the first place. s23 exemption does not have to be claimed, it is mandatory and applies to gifts out of income as of capital.
Likewise s20 exemption is mandatory whether out of income or capital but with the added spice that a gift of £250.01 or more is not exempt at all. IHTM14180 states that an exempt gift must be by one individual to another but the section clearly says the donee must be a “person” which may not be an individual, so could include a trustee or trustees and a company, English limited liability partnership, and Scots law partnership, and any foreign law entity which is opaque.
I note that the exempt amounts per ss 19 and 20 have not been re-valorised for 40 years. Perhaps taxpayers should seek help from “resident doctors”?