How does HMRC know about gifts?

Dominic Thomas
Oct 2015 • 5 min read

How does HMRC know about gifts?

You may have been very generous with your wealth and given lots of money to your beneficiaries or charity prior to your death, but how on earth does HMRC or the Executors of your estate know to correctly offset these gifts (if appropriate) against your estate?

Probably the simple answer is that if it isn’t recorded, it would seem difficult to prove a gift was made. There are a variety of issues – the annual giving allowance (£3,000) does not need to be reported, but frankly it would seem wise to record the fact that the amount is actually gifted… all helping to demonstrate the accuracy of the story behind the information.

Here’s the link to take a look at form IHT403 – which is essentially a list of gifts and transfers that you have made within the last 7 years. In short, you really need to know the dates of the gift (within a tax year), the beneficiary, a description and the value of the gift.

Inheritance tax can get rather complicated with terms like “Pre Owned Assets” “Gifts with Reservation” “Lifetime Transfers” and more. So it’s rather important that the source of gifts is documented. To my mind it makes sense that you provide a brief written, dated document to the recipient of your gift and ideally your financial planner and possibly Accountant if you have one. Certainly retain a copy within your records – but remember passwords are all well and good when you are alive, but when you aren’t here to tell anyone what they are…

Gifts from Income

I don’t wish to drown you with detail, but it is possible to make gifts from income, provided that this is not to your detriment or deliberately reduce the value of your estate for IHT planning. If that sounds like an oxymoron… well, that’s the state of the tax system.

How do you demonstrate legitimate regular gifts from income? without a summary of your tax year income and expenditure I’d suggest that it will be fairly “difficult”. A business doesn’t have this problem – there are obvious accounts, or at least there should be, but as individuals perhaps the rule of thumb ought to be – think of yourself as a business – which means keep details carefully.

Taking a look at the last page of the form IHT403, you will observe that HMRC will request details of income and expenditure for the last 7 years. Could you provide this for yourself today? if not, how on earth will your Executors?…. hence one of the reasons we ask clients to update us with income and expenditure information every tax year… enabling us to help them build up a record – but also to do all the other sensible financial planning stuff – like helping reduce income taxes, checking that our assumptions about future lifestyle costs are broadly right and where it’s all going… and ideally to help them catch rather more of it than they otherwise would. So yes, those forms are rather important both whilst you are alive or deceased.

In practice, it is possible that HMRC might even wish to go even further back in time, perhaps as much as 14 tax years prior to death…. so my advice is to get your “ducks in a row” – which has several important positive by-products.

Better budgeting
Better financial planning
Lower income taxes
Reduced costs
Longer-lasting wealth…

You heard it here – make an HMRC form your best financial planning tool!

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How does HMRC know about gifts?Dominic2024-03-13T10:42:33+00:00

Where are you originally from?

Solomons-financial-advisor-wimbledon-blogger

Where are you from originally?

Today, this may sound like a loaded question, so let me explain. The UK has a plethora of international tax agreements. Financial planning is always set in a context – it can be done in almost any country and is a growing profession in northern Europe, India and China. A financial planner needs to understand where you are deemed resident and where you are deemed domiciled as this has considerable impact on any planning in the present, but also in the event of your death.

Global Death Duties

The world seems smaller because of our ability to communicate and travel much more easily, within a few hours, you could be… well, the other side of the world. Britain’s multi-cultural history might be reasonably easy to plot, but how about your own? If you aren’t here to correctly explain the where, when and why… who has the accurate details?

IHT401

The form IHT401 asks for a full history (take a look by clicking the link). The information requested covers some of what you may think is obvious (where you are from, your nationality etc) but also details about your education and employment. If you were not born in Britain, even if you have lived here since before you could walk, this is a form that you should prepare for your Executors. It has implications for where you are taxed and how much tax your estate will pay in the event of your death

Do yourself and your estate a favour..

The information requested by HMRC is probably easy for you to put together reasonably quickly, so can I urge you to do so. It will always be much harder for someone else to collate and verify your history, so make it easy for them to do so – by getting it done yourself.

This is more than a casual glance at LinkedIn with information of your career to date (assuming that your online CV is accurate). Naturally any Executor will need to check the information, so make this easy for them to find – provide it in a safe place or even in advance to each of them.

To my mind it makes sense for a financial planner to hold this same information about you as well – because investments that you make need to be set in the context of potential global taxes and of course ensure that the advice is suitable, appropriate and rather obviously – legal!

So, if you weren’t born in the UK – please take a moment to download the IHT401 form and fill it in, saving it to your records and if you are a client and haven’t done so already, send me a copy. Don’t put it off any longer.

Dominic Thomas
Solomons IFA

You can read more articles about Pensions, Wealth Management, Retirement, Investments, Financial Planning and Estate Planning on my blog which gets updated every week. If you would like to talk to me about your personal wealth planning and how we can make you stay wealthier for longer then please get in touch by calling 08000 736 273 or email info@solomonsifa.co.uk

Where are you originally from?Dominic2023-12-01T12:19:55+00:00

Budget 8 July 2015

Following my recent email and Mr. Osborne’s announcements, I am pleased to confirm the following changes and amendments have been made to our App (which is available free of charge for iphone, ipad and Android platforms).

As the 2016/17 rates are being added after the Autumn Statement, there is only one small change to the 2015/16 rates and the change has already been made earlier this afternoon and is live in your App. The change was within the Main Capital and Other Allowances section of the tax tables and related to the change to the Annual Investment Allowance from 1st January 2016 from the previously announced limit of £25,000 to a new limit of £200,000.

On a separate note, the chancellor has, from April 2016, abolished dividend tax credits. This will fundamentally change 3 of the tax calculators so they will need to be changed when we complete our updates prior to the April 2016 budget. However for the remainder of this tax year, all calculators and tax tables remain fully accurate.

Dominic Thomas
Solomons IFA

Budget 8 July 2015Dominic2023-12-01T12:20:16+00:00

Estates: Your Will online forever

You may not be aware that the Government has now made it possible to search for Wills online. So once you are gone, your last Will and testament is available for anyone to see, should they wish to. Essentially it is nothing more than a searchable database which enables anyone to pay £10 to obtain an electronic copy of historic Wills, assuming the system works, you will receive your copy within about 10 days. It is free to search, but the Will itself costs £10.

It is estimated that there are over 41 million Wills and Grants of Probate on the database, which are compiled from 1858 onwards for England and Wales. I’m reminded of the film “Waking Ned Devine” which is a comedy about a man who wins the lottery but dies from shock, to collect his winnings, he has to be alive, leaving his community to concoct some creative solutions.

Implications

There will be some people who certainly won’t relish the prospect of their Will being published online – perhaps a few celebrities or even Royalty. Remember that for some people a Will reveals the state of family relationships at the point the Will was made.

HMRC better informed?

Perhaps the more important point about a Will or Grant of Probate is that assets are valued and those that are inherited ought to be more visible. This essentially provides a money trail for HMRC to follow. Remember evading tax is illegal, but with this approach it really ought to be the case that HMRC are able to now close in on those that don’t declare sufficient assets in their estate.

There are also implications for capital gains tax too – if you inherit an asset, then unless you sell it, or gift it, there is reasonable grounds to assume that you still own it. If it disappears from your asset inventory, surely questions would be asked which have a knock on effect for prospect of unpaid capital gains tax and perhaps even income tax (if the asset generated income). In short, anyone that isn’t being crystal clear about their assets is likely to come under greater scrutiny.

Other implications also revolve around more “joined up thinking” in that your DVLA licence and car insurance are connected and if you now try to rent or hire a car, you need to input your NI number so that a DVLA permission certificate can be generated. This could be used to link to your investments (pensions and ISAs in particular) but why not your household insurance policy, meant to insure your physical assets.

All in all, I think this will lead to deeper and better information about us all, which will to some extent be publicly available, but more importantly available to HMRC. So make sure you declare your assets and taxes properly. Above all make sure your Will is current and reflects your wishes.

Dominic Thomas
Solomons IFA

Estates: Your Will online foreverDominic2023-12-01T12:40:15+00:00

Is your ISA safe from the taxman?

The short answer to this question is no. ISAs are a way of investing, where most of the money will be tax free. However, this largely applies to capital gains tax and income tax, though there is a 10% tax paid on dividend income within an ISA. An ISA is not something that avoids inheritance tax, although new rules would permit the fund to avoid IHT if the holdings are within AIM-listed shares and held for a minimum of 2 years. This can be an option for some people, however for those with a nervous disposition or anything below at least a “medium risk” approach to life, great caution and specific advice should be taken.

Tax avoiders watch out for muscular HMRC

However, today’s news suggests that HMRC are seeking to flex their muscles and raid ISA pots for unpaid tax. The Chancellor already proposed that HMRC could raid your bank account in the last Budget, but it seems this is likely to be extended to raiding your ISA too. This is to collect payment of taxes due to HMRC.

At the last HMRC count, (September 2014) something like £443 billion was held in ISA accounts. ISAs which officially began in the 1999-2000 tax year are due to have a major revamp in July, with the annual allowance increased to £15,000 and the ability to alter your cash holdings within an ISA. This may come as good news to most ISA holders, as still a staggering 80% of the £57 billion subscriptions in 2012-13 were to Cash ISAs, despite interest rates being… well… “poor”. So clearly the majority of people are still not using their ISAs for long-term wealth creation, if they are then they are getting some pretty dreadful advice (based on these numbers).

It may surprise you to learn that over half of people living in the South West have an ISA (53.6%) compared with London (45.4%).

Dominic Thomas: Solomons IFA

Is your ISA safe from the taxman?Dominic2023-12-01T12:39:10+00:00

Have you tried our new App?

If you are an iphone, ipad or android user, you can now try our new app. We have invested in new technology to help clients and their friends by placing a really useful tool kit directly in their hand. The app is completely free to download from the itunes store and comes with a stack of useful features. This includes financial calculators – so that you can work out how much income tax you should be paying, how much a change in interest rates will impact your mortgage, what your IHT liability might look like and the impact of inflation on your finances, to name just a few.

Tax year information

We have also included the 2014/15 tax year information, including all of the important changes from the Chancellors 2014 Budget last month. You should gain a better understanding of tax and why we attempt to reduce this for our clients where appropriate. There are also key dates for the tax year in terms of when payments need to made or filed.

Independent thinking

I have also included a bit about us and what we do, as well as links to the website and this blog, along with a link to Morningstar, who provide independent investment research, which we also use to complement the work we do with Cormorant as part of our investment committee work.

Don’t keep it a secret…

I’d be really grateful if you would leave a rating and review of the app on itunes if you like it and can see its usefulness. Of course do let your friends and colleagues know too – after all its a free app that is really useful. If you have any problems or suggestions, please email me or pick up the phone and let me know what they are. We are already planning improvements and added features to make it a really valuable tool, but want to make sure that our clients can benefit from this fully.

Dominic Thomas: Solomons IFA

Have you tried our new App?Dominic2023-12-01T12:39:09+00:00

Treasury consider restrictions to ISA and Pension Tax Free Cash

Many Things Float To The Top, Not Just Cream

It has been reported this morning that The Treasury are considering or “floating ideas” that they may restrict the amount held in ISAs – with the lowest outlined restriction being £100,000 (according to various press sources). They also propose to reduce the amount of tax free cash available from pensions. These are just “floated ideas”. However, clearly provide unsettling “news” for investors.

More Tax Fudge And Added Sweeteners

I am struggling to restrain myself from making too many comments about those that govern the nation or determine economic and taxation policy. It seems that most policymakers are determined to use the politic of envy rather than common sense to determine the general direction of policymaking. Sadly this seems true at both ends of the spectrum – either suggesting that the “rich” aren’t paying enough tax or the poor are taking too much in benefits with the middle ground being the ones that actually receive the focus of political bribery – be it energy price freezes or a partial share of personal allowances for married couples. As you will have gathered I find it difficult to be anything other than cynical about politicians when it comes to tax.

An Overly Controlling Parent

If we wish to encourage financial independence from the State, we have to provide a mechanism to do so. We are now at the start of compulsory pension contributions (Auto Enrolment) whilst at the same time reducing the amount that can be held in or paid into a pension. Tax rates are incredibly complex and largely about giving the appearance of “fairness” rather than being “fair”. Rather than create an environment of encouraging people to hold assets in Britain, the tax regime is having the opposite effect. As a result potential tax revenues and “business” flow away from the UK to places like Monaco. It would appear that even Richard Branson has now given up and relocated permanently to his own island.

Tax Tail Is Wagging The Dog

The result of restricting what I might call “mainstream” investing is that more and more people get tempted into forms of investing that are largely about potential tax reduction than good investing. Despite all the problems of the Credit Crunch, the Government are still hell-bent on property ownership and increasing personal debt they have also proposed holding AIM listed shares in ISAs in order to possibly reduce IHT (inheritance tax). The restrictions on pension contributions and higher tax rates encourage use of tax shelters. As with most things, not all are “bad” but sadly many are pretty awful ways to invest (except for those running the schemes). The degree of investment risk is rising – dramatically. When it all goes wrong (due to poor research, naivety or folly) the adviser community will have to pick up the bill, which will reduce the number of advisers and thereby resulting in fewer people receiving decent advice.

Keep To The 7 Key Principles

I actually do not care that much about tax free cash on pensions or how much can be held in an ISA. What bothers me is the deliberate manipulation for political “advantage”. There is no genuine attempt to simplify tax or investing. If there was we would have one rate of tax. Financial planning is not about minimising tax or maximising returns. It is about planning your lifestyle and figuring out what you need and how to best achieve and maintain such a position. When terms are used like “we’re all in it together” this is blatantly only applicable to those than remain in the UK. The question is “in what?” Sadly successive Governments have failed to keep to a single of my 7 financial planning principles. 1. Spend less than your income (keep within budget). 2. Saving part of your Budget. 3 Have a sensible reserve and maintain liquidity. 4 Have a proper financial plan with a purpose. 5 Avoid the use of credit and focus on clearing debt. 6. Diversify risk appropriately. 7 review the plan regularly.

Dominic Thomas: Solomons IFA

Treasury consider restrictions to ISA and Pension Tax Free CashDominic2023-12-01T12:38:25+00:00

Taxing the Family – Child Benefit

If you are a high earner and have children you will be well aware of the changes to child benefit which came into effect on 7th January 2013. In this instance a “high earner” is someone with income of £50,000 or more, which is probably what most would not think of as a “high earner”. HMRC believe that a large number of families are affected by the rule changes and should now have registered for self-assessment as a result. Failure to do so may result in a penalty – given the hunger of HMRC to collect as much as possible, this is likely and will come as a further penalty to those that are already losing the child benefit.

Expect Little Sympathy with £422m at stake

It will be difficult to plead that you didn’t know when over 2million higher rate taxpayers were written to about this topic by HMRC. Pleading the case for children to authoritarians often doesn’t wash, as the wonderful Charlie Chaplin discovered in “The Kid”. The official figures suggest that around 400,000 people have ended up opting out of receiving child benefit, which is currently £20.30 per week for the eldest child and £13.40 for each subsequent child. So in theory those that opted out have saved the State a minimum of £1,055.60 a year each, which is £422m. The last HMRC estimate suggested that they believed 600,000 would be affected.

Dominic Thomas: Solomons IFA

Taxing the Family – Child BenefitDominic2023-12-01T12:23:58+00:00

HMRC in focus on landlords… that’s you Rigsby!

Landlords, the taxman cometh… HMRC is beginning to focus on landlords that are not properly (fully) declaring the income that they receive from rental property. HMRC estimate that 1.5m landlords may have underpaid or failed to pay up to £500m in tax between 2009-2010. The campaign is fairly general, but emphasis will be placed on those with more than one let property. They will also focus on specialist landlords – such as landlords to students.

Please remember that if you are going abroad and let your home, this is still potentially assessed as UK income and would therefore need to be fully disclosed. The HMRC campaign, like those before it gives taxpayers the chance to come forward and declare the income and voluntarily put their affairs in order. This is therefore an opportunity for many landlords to come clean about income. Obviously, those that wait for HMRC to come knocking on the door will face a rather more sanguine attitude to non compliance – and remember non payment of taxes can carry a custodial sentence…. not something that anyone wants “by mistake”. So make sure that your Accountant has provided the right information.

Dominic Thomas: Solomons IFA

HMRC in focus on landlords… that’s you Rigsby!Dominic2023-12-01T12:23:53+00:00

Marriage Tax

You may have picked up from the headlines in various news media, that the Government have once again pushed the notion of married couples being able to share their personal tax allowances. This is a highly inflammatory issue as you may imagine. Those of us that are married probably did not do so in order to enjoy tax breaks. Frankly, I’m not sure why this issue has raised its head again.

In truth married couples already enjoy certain tax advantages. The most obvious being that there is no inheritance tax to pay between them and essentially they enjoy (or rather the wider family does) a doubling of the personal “nil rate band”. This assumes that they have a valid Will in place – not having a Will does rather reduce the impact of this valuable benefit.

In addition, capital gains tax allowances can also be shared across a married couple and of course one could argue that the ISA allowance, whilst being individual, enables a couple (married or not) to invest twice as much between them. So whilst there are reports of “backbenchers” (never named, if indeed they exist) calling for tax advantages for married couples, one might suggest that they already exist. However, this is about the personal allowance and essentially a married couple sharing unused personal allowances between them. According to the BBC website the Government initiative will save some people about £150 a year. Hang on? If the personal allowance is £9,440 in 2013/14 (for those under 65) this is how much each individual can earn tax free. So assuming a basic rate taxpayer (20%) would otherwise not enjoy any of this, then surely the tax advantage is 20% of £9,440 which is £1,888 of tax saved. Certainly this figure reduces if earnings are in excess of £100,000, at which point the effective rate of tax is 60% as the personal allowance is gradually withdrawn.

I know tax is complex – more so the more you earn and the greater your assets, but for those on say £80,000 a year as a single income, then all that is really happening is a doubling of the personal allowance, to £18,880 before any income tax is payable. The next £32,010 will be taxed at 20% and then the remaining £29,110 would be taxed at 40%. The overall tax rate being 22.5% (income tax as % of £80,000). This against the current system of a single personal allowance and relevant tax rate of 27.2% and extra income tax of £3,776. As you will have gathered, the tax saving is on a case by case basis, but I cannot agree with the BBC’s figures of £150 saving – its closer to that each month, not each year. This prompts my often trodden path of “do they understand the figures? ” (both politicians and journalists).*

There can be numerous reasons for a spouse not to be working. This might be voluntarily, or enforced (redundancy of illness). The problem with every rule is that there is always likely to be a good case to be made for an exception and one can only really fall back on the principles of fairness to all. If this were truly any politicians cause, then we would not have such a complex tax system or benefits system. Both need to be simple and ideally with a single rate of tax and benefits across all forms of income, earned or paid as interest or dividends. This is certainly not a simple issue and as a result can only be for perceived political advantage. I don’t know about you, but I am fed up with politicians of any persuasion, trying to buy votes, we deserve better treatment than that surely. We would all like to pay less tax, naturally, but we also know that tax funds our infrastructure, healthcare, welfare, armed forces, governance and the wider economy, the real question is surely is tax fair? and if so, is is being spent wisely?

* It seems that the BBC figures are indeed correct. The current, or rather original proposal was to only allow £750 of the personal allowance to be shared between spouses, amounting to £150 (20% tax). It only applies to couples where the higher income member is a basic rate taxpayer and not available for higher rate taxpayers. So as usual, the devil is in the detail and all that this really suggests is the politicians cannot be trusted to tell a full story and frankly this is a lot of hot air….

Dominic Thomas – Solomons IFA

Marriage TaxDominic2023-12-01T12:23:45+00:00

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