Giving away surplus income as a gift to family members is often touted as an excellent way of planning for the future and as a way of reducing liabilities on a person’s estate. But how do the rules regarding gifts work in practice?

Gifts provided from surplus income – i.e. income less usual expenditure to maintain your standard of living – are not considered as remaining part of a person’s estate, regardless of how long they survive for following the gift and should, therefore, be free of inheritance tax (IHT).

Under the current rules, there is no limit on the amount that you can give away as a gift out of income, but it is recommended that a letter of intent is prepared when making such regular gifts.

This can be provided to HM Revenue & Customs (HMRC) in the event of a short period of giving due to a change of personal circumstance. In addition, there is no requirement for the donor to survive seven years for the gifts to be free of IHT, unlike lifetime gifts.

Where gifts are to be made to a minor, and regular payments may not be appropriate, then a discretionary trust into which the payments are made might be more suitable.

Normally, there is IHT on the transfer of income into the trust if the nil rate band is exceeded, although the accumulated income in trust will not use up the Nil Rate Band. However, this does not apply where regular gifts out of income are made.

Please note that there is an IHT charge every 10 years based on the value of the trust’s assets at the date of the 10 year anniversary and the maximum tax rate is six per cent.

The 10 year charge can be avoided by distributing the assets in the trust prior to the 10 year anniversary of the trust. Alternatively, a number of different trusts could be set up with the amount invested into each trust restricted so that the nil rate band is not exceeded at the 10 year anniversary of the trust. However, the growth in the value of the assets in the trust would need to also be taken into account.

The trust should have no other assets in addition to the regular gifts out of income and each should be set up on a different day, as multiple trusts set up on the same day are aggregated for the purpose of determining whether the Nil Rate Band has been exceeded at the 10 year anniversary.

Those considering giving away surplus income should keep a record of the gifts and record their income in the fiscal year, including expenses, as this would be required by the executors to ensure no inheritance tax is payable.

Link: Inheritance Tax: Gifts

The Pensions Regulator (TPR) has announced that employers could have their businesses’ assets seized to pay their debts if they fail to pay workplace pension fines.

TPR has powers to fine employers who do not comply with workplace pension rules. However, it has also confirmed that it is willing to secure court orders if the fines are not paid.

Where a court order is acquired and the business does not pay, it will appoint High Court Enforcement Officers (HCEOs) to enforce the orders in England and Wales, with an equivalent level of enforcement in Scotland and Northern Ireland.

Those employers who fail to repay the fine could receive a visit from a TPR appointed HCEO at their business premises and have items removed and sold to recover the value of the amount owed.

This could include the employer’s vehicles, machinery or any other assets on the premises owned by the business.

Darren Ryder, TPR’s Director of Automatic Enrolment (AE), said: “Automatic enrolment is not an option, it’s the law. Those who break the law by denying their staff the pensions they are entitled to should expect to be punished – and must pay any fines they are given.

“AE has been a huge success thanks to the vast majority of employers who do exactly what they should, but a tiny minority not only ignore their automatic enrolment duties but fail to pay their fines, even after the courts have ordered them to.

“The use of HCEOs is a last resort for us. Unfortunately, the behaviour of a tiny minority means it may be necessary.”

As part of its enforcement programme, TPR will also consider whether it should prosecute employers that remain non-compliant with their automatic enrolment duties after receiving a court order demanding that they pay their fines.

Link: Assets to be seized from employers that snub workplace pension fines    

According to HM Revenue & Customs (HMRC), the number of underpaid workers getting the money they are owed under the National Minimum Wage (NMW) legislation has more than doubled.

The Revenue’s latest figures show that in the 2017/18 tax year its investigators identified £15.6 million in pay owed to more than 200,000 of the UK’s lowest-paid workers.

This amount was up from £10.9 million for more than 98,000 identified in the previous tax year.

Much of this increase has been attributed to HMRC’s online complaints service, which was launched in January 2017, and is thought to have contributed to the 132 per cent increase in the number of complaints received during the last 12 months.

The online service is open to anyone with concerns about not being paid the NMW either by a current employer or former employer and is completely anonymous.

The new data has been published alongside the Government’s annual advertising campaign, which aims to inform and encourage workers to take action against their employer if they suspect they are being paid less than the NMW.

Due to run online over the summer, it urges underpaid workers to complain by completing a quick and easy online form.

Business Minister Andrew Griffiths said: “Employers abusing the system and paying under the legal minimum are breaking the law. Short-changing workers is a red line for this Government and employers who cross the line will be identified by HMRC and forced to pay back every penny and could be hit with fines of up to 200 per cent of wages owed.”

Penny Ciniewicz, Director General of Customer Compliance at HMRC, added: “HMRC is committed to getting money back into the pockets of underpaid workers, and these figures demonstrate that we won’t hesitate to take action against employers who ignore the law.”

Link: HMRC doubles number of workers receiving back pay by enforcing the National Minimum Wage

A number of key projects at HM Revenue & Customs (HMRC) have been placed on hold to make staff available for Brexit issues, including Making Tax Digital for Individuals.

The simple assessment rollout and real-time tax code changes, both part of MTD for Individuals, will not be introduced as planned according to an HMRC stakeholders email due to a “change in priorities” in the department as it focuses on creating sophisticated digital trade systems.

The email stated that while its transformation programme was on schedule it had not necessarily been “smooth sailing”.

It states: “We were overly ambitious about the number of customers who would stop contacting us by phone and post after we introduced digital channels. Demand is falling, but not by the amount assumed in 2015.”

Despite changes to MTD for Individuals, HMRC has insisted that the Making Tax Digital (MTD) for VAT programme, due to come into effect in April 2019, will remain on track. However, it is yet to comment on MTD for other taxes, which is expected in April 2020 at the earliest under the current implementation timetable.

“The MTD for Individuals programme has made significant progress here, so we’ve laid foundations that will enable us to return to this in the future,” the email said.

“We will pause work to digitise services that impact fewer numbers of customers, such as those paying Inheritance Tax, or applying for Tax-Advantaged Venture Capital Schemes and PAYE settlement agreements.”

Among the casualties of the delays will be simple assessment, which was intended to take two million people out of self-assessment and ease the Revenue’s workload.

However, HMRC has previously revealed that it has encountered issues for taxpayers and problems for their tax agents, with taxpayers only being given 60 days to correct errors.

Yvette Nunn, Co-Chair of ATT’s technical steering group, welcomed the pause to these projects, but called on the Revenue to “use the extra time given to iron-out the known problems with simple assessment and dynamic coding before they hit play on them again.”

Link: HMRC scaling back digital projects to ‘release project capability to EU Exit work’

With the issue of intergenerational fairness continuing to be high on the agenda, a thinktank has suggested that the Treasury returns to the drawing board when it comes to taxing bequests and inheritances.

Instead of Inheritance Tax (IHT), the Resolution Foundation has floated the idea of a ‘lifetime receipts tax’, which would give individuals a lifetime tax-free allowance, with further thresholds above this amount for lower and higher rates of tax.

It is estimated that such a change could enable the Government to raise an extra £5 billion by 2020-21.

Perhaps the most radical aspect of the proposal is that it would tax beneficiaries, rather than estates. The Resolution Foundation suggests that this would provide an incentive for people to distribute their wealth more widely.

Adam Corlett, the Senior Economic Analyst at the Resolution Foundation who wrote the report, said: “Inheritances are already worth over £100 billion a year, and their doubling over the next 20 years means they are going to play an even larger role in shaping British society.

“But the current system of Inheritance Tax is not fit to deal with this societal shift. It currently manages the uniquely bad twin feat of being both wildly unpopular and raising very little revenue.”

The current system of IHT raises just 77p in every £100 raised through taxation and only applies to the largest four per cent of estates.

Link: Calls for complete overhaul of ‘unfit’ inheritance tax system