With the extension of Inheritance Tax (IHT) to most unused pension funds and pension death benefits from April 2027, IHT is very much in the public eye.
With timely advance planning, however, it is still possible to take advantage of valuable IHT exemptions. These include the annual exemption of £3,000; and the exemption for small gifts made to individuals not exceeding £250 per tax year, per recipient. And, of course, it should be remembered that gifts from one spouse or registered civil partner to another are generally fully exempt. But it is always important to get the rules right, and we look here at a recent decision from the First-tier Tax Tribunal where things did not go to plan.
Normal expenditure out of income
The exemption for normal expenditure out of income is perhaps one of the less well known exemptions from IHT. It can be available where someone makes a gift:
• that is part of their normal expenditure and
• taking one year with another, it is made out of their income, and
• after allowing for all transfers of value forming part of their normal expenditure, the giver is left with sufficient income to maintain their usual standard of living.
This was the exemption that donor, Mr Hosking, hoped would cover extensive giving to political causes he supported. Failing that, there were other arguments in his armoury. In the end, though, the gifts being challenged, totalling over £1.7 million, left him with an IHT bill of nearly £350,000.
What went wrong?
Mr Hosking ticked two of the boxes. There was no doubt that he had income significantly in excess of his personal living needs and those of his family. His donations were substantial. In addition to the gifts under discussion at the Tribunal, there were contributions to rescue Crystal Palace Football Club, gifts to heritage railways, and other gifts to charities and political causes in excess of £20 million. HMRC agreed that these gifts were made out of income, and did not impact Mr Hosking’s standard of living.
That left the question of whether gifts to various pro-Brexit causes between 2011 and 2016 were part of Mr Hosking’s ‘normal expenditure’. Had the Tribunal been given clear evidence that the giving was part of a settled pattern of expenditure, Mr Hosking might have won the day. The Tribunal was looking for signs of definite predictability or regularity in the donations over a period of time; or a prior commitment to make gifts out of future expenditure, backed up by documentary evidence. But it didn’t find them.
The Tribunal decided that though the gifts made by Mr Hosking were not ‘out of character or abnormal and in that sense were “normal expenditure”’, amounts donated varied tremendously year on year, and there appeared no settled prior commitment. For these reasons, the gifts did not fall within the meaning of normal expenditure as set out in the legislation. On this, and on other grounds, Mr Hosking’s case failed.
We can help
To benefit from this particular exemption, it is essential to be able to demonstrate a settled pattern of expenditure, measurable over a period of time or by a definite commitment to future expenditure. Do please contact us for further advice on this, or any other aspect of IHT.