Cheyney Goulding

Cheyney Goulding Solicitors

t: 01483 56 76 76   e: legal@cheyneygoulding.co.uk

Tristan Evans

A lesser known way to reduce your Inheritance Tax bill – Gifts out of Income

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Most forms of tax relief or exemption have an upper limit, such as the income tax personal allowance.  

However, Gifts out of income have no upper monetary limit and are exempt from IHT subject to certain conditions.

 What are “Gifts Out of Income” and how can they be used to lessen IHT? 

The normal expenditure out of income exemption applies to certain gifts, such as cash and, in some instances, chattels. The exemption is limited only to the extent of a testator’s surplus income.  It can be a very useful way to  reduce the size of your estate, and therefore lessen the amount of IHT paid by your loved ones.

There are qualifying conditions to be met. Amongst other things the gift must be made as part of the normal expenditure of the benefactor; the benefactor must retain sufficient income to maintain their standard of living; and gifts must be made from income.  

It is surprising that more people do not make use of it. 

The gift must be made as part of the normal expenditure of the testator 

HMRC’s interpretation is that gifts should form part of a regular pattern of payments. An exemption may be made available where there is evidence that the testator had made a commitment regarding any future expenditure. This needs to be documented so as to avoid problems for your personal representatives later.  

The testator must retain sufficient income to maintain their standard of living 

The amount of the surplus obviously varies all the time It is helpful to prepare an income and expenditure assessment, each year, to clarify the position. Any document that provides evidence of a gift, should also confirm that despite the gift (and any similar gifts made) the testator will have sufficient income to maintain their usual standard of living. 

Gifts must be made out of income  

The exemption can only apply when expenditure is from surplus net taxable income. This can include salary, dividends, pension or business profits. Income can be identified in the same year as gifts have been made, as it demonstrates that there is sufficient income available.  

However, income from earlier years is not seen as income indefinitely. There are no set rules about when accumulated income becomes capital. HMRC will normally consider this to be after two years. This can cause a problem where income has been accumulated. 

Record keeping 

A recommendation is that the testator writes a letter to their chosen beneficiary to record the gift. The result of this means that keeping a copy of the letter represents evidence of the testators’ intentions. Furthermore, financial records of gifts, such as bank statements, can help demonstrate that payments have been made. Additionally, documentary evidence that shows that such payments are gifts can be helpful, this can be a simple, signed ‘Gift Memorandum’ or even a letter to the intended recipient.  

Be careful!

However, always talk us before making any sizeable gift. There are potential problems that you need to be aware of, such as the possibility of the recipient’s relationship breaking down. This can lead to a substantial amount of your gift leaving the family, and disappearing with your ex in-law! We are able to offer solutions for this.

If you would like to know more about inheritance tax and the various tax-saving schemes, please do not hesitate to contact Christopher Seddon, who is the head of our Private Client Team for guidance and an initial free telephone consultation. 

Email: cseddon@cheyneygoulding.co.uk

Telephone: 01483 796008

Unless orders and the consequences of breaching one

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An “unless” order is an order that, unless a party performs an obligation by a specified date or within a particular period, they will be penalised by the sanction set out in the order. The Court’s power to make an unless order is contained in the Civil Procedure Rules (CPR) 3.1(3).

The Courts will consider both the breach that led to the rise of the unless orders and the breach of a unless order when deciding whether to grant applications for relief from sanctions.

There are three types of breaches where there has been little scope for ambiguity:

  • Failure to act at all: 
    • If an order requires a party to take a positive step and has done nothing at all, this is a breach of the order.
  • Failure to act before a deadline:

A breach occurs if the requested action is not completed within the deadline specified in the order. The considered date of service, not the date the document was received, is used to determine compliance where unless order specifies a deadline for serving the document.  If a party does wish to operate based on the actual date of receipt rather than the deemed date of service, there will need to be an express written agreement.

  • Failure to pay a sum of money:
    • This is where the sum of money has not been paid in full. 

The consequences of breaching an unless order and making an application for relief

The case of Marcan Shipping v Kefalas [2007] from the Court of Appeal confirmed that a failure to comply with the terms of an unless order will result in the sanction prescribed in the order taking effect automatically and if an application is made to enter judgment under CPR 3.5(5), the Courts will consider whether the order should be made to reflect the sanction already in effect.

CPR 3.9 came into force on 1st April 2013 and CPR 3.9(2) requires an application for relief to be supported by evidence. Applications for relief are generally made under CPR 23 by application notice and supporting witness statement.

Once a breach has been established, the sanction will take effect even if the defaulting party takes steps to comply at a later date.

Any applications for a breach of sanctions had often suffered harsh decisions and unjust consequences. The judgment in Denton v TH White [2014] changed all of this and led to the creation of the Denton Test and application for a breach of sanction became far more proportionate. There has become an encouragement of parties to co-operate and address any minor defaults between themselves. 

Therefore, under CPR 3.9 it sets out the circumstances that supports the Denton Test stating that the Courts should:  

“Consider all the circumstances of the case, so as to enable it to deal justly with the application, including the need:

(a) for litigation to be conducted efficiently and at proportionate cost; and

(b) to enforce compliance with rules, practice directions and orders.”

The Dentons Test

The Denton Test was established in the Court of Appeal following Denton v TH White [2014] with a three-stage test:

  1. The seriousness or significance of the breach

This is essentially a matter of judicial discretion regarding whether a breach is serious or significant. A breach may be considered serious even if it does not affect the progress of litigation. Breaches that cause a trial date to be vacated are also likely to be considered serious and significant. 

  • The Court will consider why the default occurred

The failure to comply with an unless order suggests a serious and significant breach, but the Court will also consider the underlying breach and not just solely upon the breach of the unless order. 

  • The circumstances of the case

This will enable the Court to deal with the application fairly. They will take into consideration the two criteria set out in the Civil Procedure Rules (CPR) 3.9 

When is relief from Sanctions needed?

A party may require relief from sanctions if they do something wrong, such as a breach or a failure to comply with directions. As soon as a party has realised their error, they should apply to the Courts for relief from sanctions as a matter of urgency. The Court will then take into consideration using the Denton Test if there should be a relief from sanctions. 

This guide is for general information only and does not constitute legal advice. If you would like to discuss anything in this article, please get in touch.