UK Tax Questions? Ask a UK Tax Advisor for answers ASAP
Gifts out of income. Q1. Can occasional large asset purchases eg; motor car at £25K be paid for by withdrawing from savings or investment portfolio sale and EXCLUDED FROM EXPENSES for the year - thus releasing more surplus income after expenses for gifting out of income ? Q2 What (HMRC) document clarifies this area of capital asset spending for IHT gifting out of income ? Q3 If Q1 answer is NO - Can husband gift the £25K car purchase money to wife so SHE buys the car and thus leaves the husband's Gifts out of surplus income unaffected ? Thx, AHG 22.00 05.11.2013
PS I am familiar with the Gifts out of Income HMRC concepts
and maintain page 6 of IHT403 records annually to help my heirs
with admin after my death - but need answers to Q1,2,3
Hello and thank you for your question. I will be very pleased to assist you. I'm a practicing lawyer in England with over 10 years experience.
Could you kindly clarify that you are looking at potentially purchasing this car for yourself or your wife rather than a third party (e.g. a child) please?
The motor car would be a family vehicle for joint use my wife and myself aged 74 +/- Our Children live in their own homes.
Actually the "Motor Car" is simply an example of ""Capital Expenditure""
Presumably your advice on allocation of money to "Capital Items" would also apply to, say, a new kitchen at C£20K ?
Thx, 10.00 06.11.2013
My apologies for the delay in reverting to you - I have been out on an appointment this morning. Thanks for the clarification.
The first thing to say is that there is no limit on the amount of capital you can spend on items you wish to buy for yourself - e.g. a car, holiday, home improvements and so on. Equally there is no limit on the amount of capital you can spend on or gift to your spouse. You can spend an amount on you and you spouse - £1 or £10m and it makes no difference to the amount you can gift to others as part of your £3,000 annual exempt amount nor does it impact on the amounts you can gift to others out of income.
Making gifts to persons other than your spouse (and spending money on yourself) however is a different matter if your estate is liable to inheritance tax - between you and your wife you have a £650K allowance before your estate is taxed at 40% on anything above that figure.
If you are in that position where IHT may be payable on your estate then there are limits to what you can give away to third parties. You can each give away up to £3000 in capital to third parties in any tax year (double in the first year if you did not use your £3K allowance from the last year. You can also give away additional sums for special occasions e.g. weddings. If you give away more than these amounts, that is entirely your right and those gifts will stand however if you die within 7 years of making such gifts over your allowance then HMRC can treat your estate as if you had not given away such amounts over your allowance. e.g. if you gave away £10K and died the next day HMRC would treat your estate as if it had still had £7K of the £10K (i.e. £10K-£3K allowance) in it and tax it accordingly (there is taper relief available if you survive more than 3 years on a sliding scale)
In addition to the above you can give away as much as you like from excess income with the only limit being the amount of income you have available to give away. In order to qualify however the gifts must pass three criteria:
Capital withdrawals would not qualify to designate as gifts out of income and would so far as they ar over your £3K annual allowance be treated as a potentially exempt transfer if gifted to a third party - i.e. as discussed above would fall out of your estate after 7 years but prior to that would be taxed on death as if you had not given it away.
In answer to your final question, so far as it is not made clear above, whether you buy the car (in your example) for yourself or your wife as a gift it makes no difference to your allowances as you can buy as much as you want for you and your wife without effect on your allowances.
References for the above information is the inheritance tax manual IHTM14241, IHTM14250-1 and s21 Inheritance Tax Act 1984 and Finance Act 1986.
Is there anything above I can clarify for you?
A comprehensive reply, for which I thank you.
For absolute clarity - do I understand that when buying the £25K car, from CAPITAL ( Savings or realised investments) this can be ignored and omitted from the records and calculation of the disposable income to maintain our normal standard of living ?
My motive is to leave a clear financial annual record for my family/executors to minimise their work as my estate will be substantially above the
A pleasure. Yes in deed if buying items for you and your wife this has no bearing on IHT for gifts to third parties be it out of capital or income.
You motives will prove very helpful to your executors as tracing records for gifts especially gifts out of income can be difficult if there is a lack of records.
Is there anything above I can clarify for you any further?
That completes my mission - Thank you 06.11.2013