Writing for Taxation magazine’s Readers’ Forum, BKL private client tax specialist Terry Jordan answers a query on whether a couple’s expenditure on their adult children is exempt from inheritance tax (IHT).
The tax query
‘My clients (a married couple living together) have two adult children. Their daughter lives at home with her parents. Their son lives in his own home. My clients do not charge their daughter rent and pay all the utility bills (including broadband) for the household and the council tax. They also pay for all their daughter’s food and toiletries. When their daughter joins her parents on a family outing, her parents will usually pay everyone’s train fares and the restaurant bill for any food eaten out. To equalise the treatment of both children, the clients prepare a rough calculation of the monthly amount they spend on their daughter and pay an equivalent amount to their son every month. Whenever their daughter or son goes on holiday, the parents make a contribution to each of them to cover some of the additional costs the child incurs while away.
My clients’ income is more than enough to cover all the amounts they give their children and their standard of living is not affected. May they treat the above expenditure as normal expenditure out of income and so exempt from inheritance tax? Does it matter that the amounts spent vary from month to month? How would the exemption work in relation to the household utility bills and the meals out, which the parents also enjoy? If the parents chose to pay some of the bills out of their savings, would that matter, as they have enough income to cover the costs?’ Query 20,616 – Full Nest.
Terry Jordan’s reply: Parents might consider giving a share in the home to their daughter
‘Full Nest’s clients’ daughter is an adult. Until she had finished full-time education or training, the parents’ expenditure would have been covered by IHTA 1984, s 11 ‘Dispositions for maintenance of family’. Now the daughter is an adult, the payments by her parents are, on the face of it, covered by s 21 ‘Normal expenditure out of income’.
At IHTM14241, HMRC says: ‘The dictionary definition of “normal” includes standard, regular, typical, habitual or usual. For the purpose of this exemption, “normal” means normal for the transferor and not for the average person. In most cases, it will be clear whether or not there is a pattern of giving, but it is not always that simple.
It is possible that a number of gifts made by one person may not qualify. It is also possible for a single gift to qualify if it is or is intended to be the first of a pattern and there is evidence of this. You will need to analyse all the facts in cases of doubt to see if a pattern can be found.
Factors to take into account in looking at any pattern of gifts include the frequency and amounts, the nature of the gifts, the identity of the donees and the reasons for the gifts.’
In this case, the donees are the clients’ son and daughter, and the expenditure is regular. It does not matter if payments are made from capital savings provided there is sufficient income to cover the gifts without affecting the clients’ standard of living. Although a chore, the clients might fill in page 8 of IHT403 as they go, so that their executors have the relevant information to hand.
The heading to the query is ‘She’s never going to leave’. Accordingly, the parents might consider giving a share in the home to their daughter. Provided the daughter occupied the property for as long as they did, and did not meet more than her share of the running costs, the gift would fall within FA 1986, s 102 B(4) and would be a potentially exempt transfer, not a gift with reservation of benefit. A one-third share held by the daughter would not be provocative to HMRC. The residence nil rate bands would be available on the parents’ deaths (subject to tapering if either estate exceeded £2m in value). A further potential benefit is that the retained shares would benefit from a discount for joint ownership on the parents’ deaths, albeit that would have capital gains tax implications.’
The full article was published in Taxation magazine (issue 5010) and is available to subscribers here on the Taxation website.
How BKL can help
Our private client tax team can provide expert advice on IHT, trusts, tax-efficient estate planning and the tax implications of situations involving more than one jurisdiction. We advise individuals (including non-doms), trustees and families.
For a chat about how we can help you, contact Ryan Bevan today or send us an enquiry.
