Mark McLaughlin illustrates the importance of expressing intentions or wishes in writing for tax purposes.
When it comes to tax, attention to detail is all-important. So, retaining documentary evidence to support the reason why something has been done can make all the difference between a tax relief or allowance being allowed or not.
Ticking the boxes
For example, the inheritance tax (IHT) exemption for ‘normal expenditure out of income’ can apply if a donor’s gift satisfies certain conditions. These are broadly that the gift must: (a) be part of the donor’s normal expenditure; (b) be made out of income (taking one year with another); and (c) leave the donor with sufficient income to maintain their usual standard of living.
But what is ‘normal’ in this context? How can it be demonstrated? HM Revenue and Customs (HMRC) offers no firm guidance in terms of what is considered acceptable evidence for these purposes.
However, a letter (or deed) from the donor stating the intention and circumstances of normal gifts to the recipient out of income (e.g., before the first of several proposed gifts) may be helpful evidence if queried by HMRC. A bank standing order (preferably accompanied by a letter to the gift recipients) might also be compelling evidence.
Dropping a hint…
Some individuals have wills dealing with their estates that include discretionary trusts. The potential beneficiaries of such trusts commonly include the surviving spouse (or civil partner) and other family members. The discretionary trust deed generally gives the trustees discretionary powers over which beneficiaries are to benefit from the trust’s income and capital, and when they are to benefit.
In some cases, the testator may prefer a specific individual (e.g., a surviving spouse) to be the principal beneficiary. Can anything be done? The will (introducing the discretionary trust) might be accompanied by a ‘letter of wishes’ addressed to the trustees, expressing the hope that the trustees will exercise their discretion in favour of a particular beneficiary. However, it is important that such letters are not legally binding, must not impose any obligation, or impinge on the trustees’ discretionary powers.
Nevertheless, a letter of wishes can offer the testator some degree of comfort that the specified beneficiary might at least be taken into consideration when the trustees consider exercising their discretion.
Just for the sake of it
It is not uncommon for close relatives to be self-employed, and for goods or services to be purchased from those relatives.
It is important to distinguish between payments for goods and services, and payments made out of natural love and affection for the relative. HMRC’s Business Income Manual states (at BIM41810): ‘Where a trader receives what is termed a gift from a close relative (that is forebears, offspring, brothers and sisters) it may normally be accepted that the sum comes to the trader not in that capacity but by virtue of the close personal relationship.’
It will generally be helpful if gifts coincide with significant events (e.g., birthdays or Christmas) accompanied by a greeting card, letter or email. However, under no circumstances should payments for goods or services be disguised as voluntary and unexpected gifts.
Practical tip
If a tax dispute between a taxpayer and HMRC reaches the First-tier Tribunal, the facts and evidence will be considered, and the standard of proof is on a balance of probabilities. Taxpayers who retain proper documentary evidence of their intentions generally stand a better chance of success than those who do not.
