Giving money to my children to avoid tax


T

tonyjeffs

If my estate is not worth enough to invoke inheritance tax issues,
and my child (age 17) has no income,
Can I give him 50k to put into a savings account, and receive interest
tax free?
If at some point I run short of money, can he give some of it back to
me?
(Ignoring the fact that he might decide not to!..)

Is this a ligitimate way of avoiding tax including Inheritance tax?

Thanks Tony
 
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R

Raymond Kirk

biggirlsblouse said:
Ah yes...I had forgotten that one...as long as you have sufficient not to
deprive yourself.

You mention that if you receive more then £100 in interest then this is not
viable.

What about Islamic accounts where no interest is received?
 
E

eclipse

I'm confused (what's new) .. is the £3000 gift allowance tax (income)
deductable?
mikej
 
R

Ronald Raygun

eclipse said:
I'm confused (what's new) .. is the £3000 gift allowance tax (income)
deductable?
No, it's not deductible against income tax, but against inheritance tax.

The way it works is that any gifts which you make (other than out of
income) in the last 7 years of your life will be treated for IHT
purposes as part of your estate. That is to say, giving stuff away
does not escape IHT unless done more than 7 years before death.

There are exceptions to this, namely that each year you can give
away £100 each to as many people as you like, plus £3000 in total
to any other people, which won't then be clawed back into your
estate upon death. All charitable gifts are also disregarded, and
there's a separate wedding gift allowance for children or
grandchildren.
 
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E

eclipse

----- Original Message -----
From: "Ronald Raygun" <[email protected]>
Newsgroups: uk.finance
Sent: Friday, April 13, 2007 11:04 AM
Subject: Re: Giving money to my children to avoid tax
No, it's not deductible against income tax, but against inheritance tax.
Thanks - getting less confused but you next paragraph pins down what is
probably
troubling me....
The way it works is that any gifts which you make (other than out of
income) in the last 7 years of your life will be treated for IHT
Its the "out of income" part.
So the £3000 max is out of taxed income?
And there is an option to gift money out of untaxed income?
mikej
 
G

GSV Three Minds in a Can

from the wonderful said:
----- Original Message -----
From: "Ronald Raygun" <[email protected]>
Newsgroups: uk.finance
Sent: Friday, April 13, 2007 11:04 AM
Subject: Re: Giving money to my children to avoid tax

Thanks - getting less confused but you next paragraph pins down what is
probably
troubling me....


Its the "out of income" part.
So the £3000 max is out of taxed income?
No, the £3000 max is from your =capital=resources. I.e.
money/shares/whatever you already have in the bank (and have probably
paid tax on).

You can give =any amount= you like from your (tax paid) income as long
as it doesn't materially impact your standard of living. I.e. if you
earn £500K a year but have always live off a mere £100k, then you can
give the extra away without it counting as a capital (i.e. possibly
subject to IHT) transfer.

You may have to fight with your taxman if large sums are involved.
And there is an option to gift money out of untaxed income?
What do you mean 'untaxed income'? You can put untaxed income into a
pension fund, for a spouse as well as yourself, but the way you do that
is by reclaiming the tax afterwards .. the taxman doesn't believe in you
getting untaxed income directly. 8>.
 
R

Ronald Raygun

eclipse said:
Thanks - getting less confused but you next paragraph pins down what is
probably troubling me....


Its the "out of income" part.
So the £3000 max is out of taxed income?
Yes. The inheritance taxability assumes you are giving away
assets or savings, but if you give away part of your income
stream without this seriously affecting your standard of living,
these gifts will not be subject to IHT. I'm not sure what the
tests are which determine effect on standard of living, but I
guess it would be whether the effect is to erode your savings.
Any income you give away which would mean you would have to
live off savings would not qualify for IHT exemption.
And there is an option to gift money out of untaxed income?
Not really, except to charities, and the way this usually works is
that you gift out of taxed income, and the charity then reclaims from
the taxman the tax you have already paid, assuming you are a standard
rate taxpayer. So if you earn £100 and pay £22 tax, you have £78
left. If you give these £78 to charity, it reclaims £22 from the
taxman.

If you're a higher rate taxpayer, it's little more complicated and
you get some tax back. If you earn £100 and pay £40 tax, it should
only cost you £60 to make sure the charity gets £100. But the
charity doesn't know your tax status and assumes you're at standard
rate, so the only way it can get £100 is for you to give them £78
and to claim £22 from the taxman. So you do that and reclaim the
missing £18 from the taxman yourself.
 
E

eclipse

Ronald Raygun said:
eclipse wrote:
Got it --- -I think.

So the principle is you can give away your income but not your existing
assets with no inheritance tax implications -
apart from if you didn't give it away it would probably add to your estate.

This is a very weird idea - wealth I've accumulated I can't give away
without IHT but money I'm earning
now I can give away as it isn't part of my accumulated wealth.

No wonder I'm confused.
Thanks.
mikej
 
R

Ronald Raygun

GSV said:
You can give =any amount= you like from your (tax paid) income as long
as it doesn't materially impact your standard of living. I.e. if you
earn £500K a year but have always live off a mere £100k, then you can
give the extra away without it counting as a capital (i.e. possibly
subject to IHT) transfer.

You may have to fight with your taxman if large sums are involved.
The taxman will have you at a disadvantage.
How much of a fight can you put up when you're dead?

:)
 
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G

GSV Three Minds in a Can

from the said:
The taxman will have you at a disadvantage.
How much of a fight can you put up when you're dead?

:)
Depends when it happens I guess. (ObSF: _Hitch Hikers's Guide to the
Galaxy_ .. probably _The Restaurant at the End of the Universe_ iirc,
where someone was spending a year dead for tax reasons?).

Get your state vector properly uploaded into appropriate hardware** and
you could run much faster than the average tax department operative.

(** an abacus would probably do).
 
T

Tim

... The inheritance taxability assumes you are giving away
assets or savings, but if you give away part of your income
stream without this seriously affecting your standard of living,
these gifts will not be subject to IHT. I'm not sure what the
tests are which determine effect on standard of living, but I
guess it would be whether the effect is to erode your savings.
Any income you give away which would mean you would
have to live off savings would not qualify for IHT exemption.
Hmmm. You could quite easily have been living off savings,
with very little actual income (and have enough remaining
savings to be able to continue this for many more years) --
and then start earning some income (for whatever reason).

In this situation, the income is *not* required
to keep the same standard of living, although
the savings would (continue to) be eroded...

Could you give up this new income, "IHT-free",
even though you are eroding your savings?
 
B

Brian W

I'm neither a accountant nor lawyer but I would have thought that its okay
to give away income even if you then erode your savings _providing_ you're
not eroding them at rate that would ever jeopdise your standard of living.

But like someone said, you might have to argue it.
 
R

Ronald Raygun

Tim said:
Hmmm. You could quite easily have been living off savings,
with very little actual income (and have enough remaining
savings to be able to continue this for many more years) --
and then start earning some income (for whatever reason).

In this situation, the income is *not* required
to keep the same standard of living, although
the savings would (continue to) be eroded...

Could you give up this new income, "IHT-free",
even though you are eroding your savings?
Yes, I would have thought so.
 
R

Ronald Raygun

Tim said:
Then would you like to revise your suggestion that:
"Any income you give away which would mean you
would have to live off savings would not qualify..." ?
Perhaps. I might insert the word "instead" in an appropriate
location, to clarify that only income which is diverted from
a previous role of supporting your cost of living should be
disqualified.

On the other hand, you can't be sure you'd get away with it.
The greedy taxman could well take the view (but would need to
justify it if challenged) that even if you have been living off
savings to support your lifestyle, and then came into a new source
of income, that the new income would then be deemed to be
supporting your lifestyle to the extent that it isn't then causing
your savings to grow.

What do *you* think?
 
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T

Tim

Perhaps. I might insert the word "instead"
in an appropriate location...

On the other hand, you can't be sure you'd get away with it.
The greedy taxman could well take the view ...

What do *you* think?
I think that it's a bit silly to try to distinguish between using
savings or income for upholding your "standard of living"...

Isn't someone's standard of living / lifestyle, actually
a function of *both* their income & their savings?
 
R

Ronald Raygun

Tim said:
I think that it's a bit silly to try to distinguish between using
savings or income for upholding your "standard of living"...
Silly it may be, but rules often are. The bottom line is that
what IHT targets is amassed wealth, including accumulated unspent
income.
Isn't someone's standard of living / lifestyle, actually
a function of *both* their income & their savings?
Well, I guess your standard of living / lifestyle is basically
"what you spend", and of course you can just as easily spend
income as it comes in as you can draw down savings, and the
same is true of how you can fund gifts.

The level of one's savings goes up or down depending on whether
one's income (plus gifts received) exceeds one's expenditure (on
lifestyle and on gifts made) or not.

The presumption with the "gifts out of income" exemption appears
to be that where one's income stream exceeds one's lifestyle
spending needs, and where therefore one's savings would show an
upward-moving trend, that one should be able to give away as
much spare income IHT-free as would reduce the long-term savings
gradient to zero, but not beyond zero, because at that point
gifts would clearly be coming out of savings.

The special situation where one's lifestyle is already funded
from a negative savings gradient (or part-funded with an income
stream which by itself would be insufficient), leads us into a
bit of a grey area, and unfortunately the rules seem to be
worded in a rather woolly fashion, since they don't appear to
refer explicitly to savings gradients. They refer to adversely
affected lifestyle or something like that. What that means is
that you can give away as much income as you like provided it
doesn't cause you to spend less on your lifestyle. In your
specific example, if you acquire an increase in income, but
do not spend more on yourself (even though you are continuing
to erode your savings), it seems reasonable to assume that the
new income can be given away in its entirety, provided that you
maintain your lifestyle spending at its pre-existing level and
that in order to do so you do not need to increase the rate at
which you're drawing down your savings.

Wouldn't you agree?
 
T

Tim

Silly it may be, but rules often are. The
bottom line is that what IHT targets is amassed
wealth, including accumulated unspent income.
Ermmm - after you've received income, *all* of it
is then (immediately) "accumulated unspent income".
Any that isn't is, well, err, hasn't been received yet!
The presumption with the "gifts out of income"
exemption appears to be that where one's income
stream exceeds one's lifestyle spending needs, ...
What if you *always* match your "lifestyle
spending" to your (net) "income stream"?
[Ie your lifestyle is "live within your means".]

In other words, you only ever "spend" what income
you have (after tax, ** & gifts ** are made!).

In that scenario, making more gifts & living off the lower
net income would be "OK" -- because your "lifestyle
spending" is automatically lower as a result, by definition.

The special situation where one's lifestyle is already funded
from a negative savings gradient (or part-funded with an income
stream which by itself would be insufficient), leads us into a
bit of a grey area, and unfortunately the rules seem to be
worded in a rather woolly fashion, since they don't appear to
refer explicitly to savings gradients. They refer to adversely
affected lifestyle or something like that. What that means is
that you can give away as much income as you like provided
it doesn't cause you to spend less on your lifestyle...
Ah, but "less than" *what* ? ...

... In your specific example, if you acquire an increase
in income, but do not spend more on yourself (even
though you are continuing to erode your savings), it
seems reasonable to assume that the new income can
be given away in its entirety, provided that you maintain
your lifestyle spending at its pre-existing level ...
Why is it your "pre-existing level" that is relevant?
You could easily increase your "lifestyle spending"
(still being funded by drawing on savings) a
short time *before* the new income appears...
Does that get around it? ;-)

... and that in order to do so you do not need to increase
the rate at which you're drawing down your savings.

Wouldn't you agree?
Like I said, I think it's a silly distinction. Any strict
application of the rule is bound to create inconsistencies.

Not least because your "amassed wealth" can create both
"income" and "gains" - and even those "gains" can be an
average between some "losses" and other (super-) "gains"...

Do you include gains when you consider "income"?
If so, do you include only those assets producing
gains (ie ignore losses), or do you only consider
your "average" gains (ie offset losses against gains)?

If gains are not included at all when considering your
"income stream" against lifestyle spending, then you could
increase your "income" (even just temporarily) by moving
more heavily into assets that create income rather than gains.
 
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R

Ronald Raygun

Tim said:
Ermmm - after you've received income, *all* of it
is then (immediately) "accumulated unspent income".
Any that isn't is, well, err, hasn't been received yet!
The "Ermmm" does not compute. Having received and accumulated
this income, you may yet spend some of it (or indeed give some
of it away), and so it will not then form part of your amassed
wealth. Not all amassed wealth derives from income.
"Ronald Raygun" wrote
The presumption with the "gifts out of income"
exemption appears to be that where one's income
stream exceeds one's lifestyle spending needs, ...
What if you *always* match your "lifestyle
spending" to your (net) "income stream"?
[Ie your lifestyle is "live within your means".]
Then your laudable frugality will, alas, not be rewarded
by the IHT man.
In other words, you only ever "spend" what income
you have (after tax, ** & gifts ** are made!).

In that scenario, making more gifts & living off the lower
net income would be "OK" -- because your "lifestyle
spending" is automatically lower as a result, by definition.
Then your lifestyle is "suffering" as a result if making gifts,
and therefore the gifts will not be IHT exempt.
Ah, but "less than" *what* ? ...
Less than before. Less than necessary to support the style to which
you have become accustomed.
Why is it your "pre-existing level" that is relevant?
Against what else would you measure an adverse effect?
Like I said, I think it's a silly distinction. Any strict
application of the rule is bound to create inconsistencies.
Perhaps so, but the rule-makers seem happy to live with them.
Not least because your "amassed wealth" can create both
"income" and "gains" - and even those "gains" can be an
average between some "losses" and other (super-) "gains"...

Do you include gains when you consider "income"?
Good question.
If so, do you include only those assets producing
gains (ie ignore losses), or do you only consider
your "average" gains (ie offset losses against gains)?
If so, it should be the average, because income would be
treated similarly in that "income" would be taken to mean
net income after deduction of allowable expenses.
If gains are not included at all when considering your
"income stream" against lifestyle spending, then you could
increase your "income" (even just temporarily) by moving
more heavily into assets that create income rather than gains.
For the reason that assets can be switched, it would make sense
to treat (realised) gains as income here, but there is the caveat
that there may be a CGT penalty involved in realising gains.
Where seriously large amounts of value are involved, you'd be
trading CGT against IHT, so this strategy would only be of use to
those who are asset-rich but income-poor (so that CGT would not
be paid at the higher rate).
 

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