Inheritance Tax and gifts from “income”

Madeinireland

Currently I am heading towards a inheritance tax problem and just considering options to deal with it in the future.

I’ve heard that one of the best ways of sorting is to give gifts from excess income.

Now I will have a good DB pension that will pay me around £30k per year and state pension.

I also have a sizeable ISA (currently mainly cash but will be aiming to invest in accumulation funds) and also shares - so in the future I was intending to sell units in the funds or indeed just cash in sums from the cash ISA’s as required to supplement my income.

Am I right in thinking this won’t help as it would just be seen as selling capital?

How might I be able to use this position to help? Would I be best to invest in funds that give an income rather than capital growth as the obvious solution. I don’t think I would need the income which is why I was aiming more for capital growth but it’s making me think that may be the best thing to do to give the the gifting flexibility.

Thanks...

AnotherJoe

For IHT purposes, its irrelevant what the "original" source of the money you gift is.

Keep_pedalling

If you will be having to sell assets to supplement your income it sounds like you do not have excess income to give.

xylophone

You might gift the income from the ISA on a regular basis to establish "regular gifts from surplus income".

Apodemus

It’s not clear from the above, but it may be that the OP is able to live on less than the income from the DB and State pensions, so may be able to make gifts from any additional income from shares or or isa. The phrase “ to supplement income” doesn’t necessarily imply that it is to help make ends meet rather than provide a surplus.

I would imagine that this would suggest investments that provide income rather than capital gains would be the better choice.

Sea_Shell

Taking this a step further, does it mean that if the only pension one has is SP (which covers their living expenses) and all their other investments are in ACC funds, they can't gift, as there is no surplus INCOME.

Verses someone who's bought an annuity with those same funds and is deemed to be drawing a "surplus" income from it?

AnotherJoe

I dont believe income would be as narrowly defined as that. After all even with Acc funds you do receive dividends, its just that they are automatically reinvested.

Madeinireland

I am able to live on the pension income alone but there may be the odd occasion where I might like to splash out the odd year on an extra special holiday and might use some capital but what I find slightly annoying is that I would have to structure my ISA’s and SIPP to focus on income rather than capital growth in order to make use of this rule when clearly it shouldn’t matter. I would prefer to be using accumulation funds to minimise cost of reinvestment. I think it would be more sensible for the tax man to focus on wether my capital has eroded or not from one year to the next. As long as the overall capital is increasing year on year it shouldn’t matter if I have used some capital as income.

Hopefully that makes sense anyway.

MK62

What IHT problem are going to have?

There's an overview of your options for gifting here

https://www.moneyadviceservice.org.uk/en/articles/gifts-and-exemptions-from-inheritance-tax

but be aware that "gifts from surplus income" might be problematic if you don't follow the rules, which as stated in the link above, can be a bit complex.

Apodemus

Acc funds still provide income, it is simply re-invested automatically - it is declarable to HMRC (if held unwrapped rather than in an ISA), so I would assume that it counts towards income for IHT gifting purposes.

But either way, I think you are creating a problem where none exists, if you want to play the rules to reduce IHT, it is surely reasonable to expect that you need to play by the rules!