Gifting out of income

fuzzzzy

Linton said:

Madeinireland101 said:

Hi - I am considering gifting to my children some of my surplus funds out of income which as I understand allows you to gift to them and remove sums from the potential threat of inheritance tax.

Does this need to be done as an individual or can you do it all as a couple?

Assuming you have to do it as an individual I assume you need to partition your income and expenses between each so you can work out how much can be given.  This can be quite difficult to do accurately and in some cases leaves a fair amount of leeway in terms of how you partition spending - Do you have to work out that level of detail or can you just assume a 50% split on spending for all things other than the  obvious like motoring costs where one individual owns the car for example?

Any advice gratefully received…

Each gift must be from an individual. If the gift comes from joint assets then assume 50/50 ownership unless there is a good reason not to.

To demonstrate that the gifts come from income your executor needs to document that total income in each year equals or exceeds total expenditure including the claimed gifts. Unused income can be carried over from the previous year but turns into savings after then.

To help your executor you need to keep detailed notes, perhaps an annotated bank statement.

There is a requirement that the gifts are regular and ongoing but reasonable flexibility should be ok. There was a test case where the deceased simply calculated her excess income each year and gifted it to her children.  The courts ruled that this met the requirement. Don’t try to be too “clever”, you don’t want to become another test case.

I was thinking about starting to do this and give a gift of £6000 tax free this year as I did not make any gifts last year, and then gift all my excess income ( presumably I can also look at the excess I did not gift last year and include that too ). Every year look at what expected excess I have and gift it before the end of the tax year. If some years there is no excess then there will be no gift, so that will be the regular gifting pattern.

Would the 25% tax free lump sum from a DC pension pot count as income so that a much bigger excess gift could be given in the year that was taken? I will also give some thought to one-off bigger gifts that will hopefully be covered by the 7 year rule.

Are there any things you can spend your money on that can be bought from saving assets? If I decide to break the habit of a lifetime and splurge on a very expensive holiday or a flash new car would that just wipe out all excess income for gifting?

poseidon1

Linton said:

squirrelpie said:

Going from @stuart321's link to the contents at https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual makes me realise just how complicated the whole subject of inheritance is. Making gifts out of income seems fairly easy if you have a pretty fixed income, like my wife - state pension plus NHS pension plus little bits of interest. Then if her bank balance is increasing she can give away the surplus funds

But in my case I have state pension plus a small DB pension, plus a SIPP. The SIPP makes things more complicated because I choose how much income to take from it. And I also have an ISA that I can choose to take income from. How is it decided whether a withdrawal from my ISA is capital or income? Ditto for my SIPP, now.

Money in an ISA or a savings account is an asset so money taken from the ISA is not income. However I think that dividends and interest earned within the ISA in the current year could be regarded as income. How capital gains fit in I am not sure. I think a SIPP could be treated in the same way. But much of this could come within my previous advice that one should not try to be too clever. Keep things simple for your executor.

In my case all my ISA investments generate income the entirety of which is distributed out of the ISAs to me as  they arise. This is a mix of corporate bond interest, dividends from funds and shares and of course bank interest paid on cash ISAs. All are easily identified from statements and schedules produced by the investment platforms and banking institutions.

 Therefore if I were to commence a pattern of surplus income gifting, theses statements/schedules plus supporting bank statements would be maintained for reference by a future executor.

As regards Sipp income, that is easier. I will get an annual p60 from the sipp provider setting out how much of the UFPLSs constitute pension income taxed at source and for which I will have additional tax to pay thereon and therefore clearly part of the surplus income total after deducting any higher rate tax for the year.

Suggest   suirrelpie   have a read of the link below from a solicitor firm setting out points to bear in mind in considering gifts out of surplus income. Helpfully, in my view, they reccomend start with income that would be reported on your respective tax returns, and then ensure you include your non taxable ISA income  on top. 

https://www.gabyhardwicke.co.uk/briefing-notes-and-faqs/inheritance-tax-exemption-for-gifts-out-of-surplus-income/#:~:text=If you prepare income tax,gifts out of surplus income

Of course the key with regard to isa income in a stocks and shares isa, is you must have investments that actually payout income distributions, so clearly accumulation unit trusts, shares and etfs  that do not pay a dividend ( or interest) , will not work for that purpose. However anyone who is serious about utilising gifts out of surplus income exemption will be happy to make appropriate changes to their ISA portfolios to facilitate this.

Workerbee999

[Deleted User] said:

Linton said:

Each gift must be from an individual. If the gift comes from joint assets then assume 50/50 ownership unless there is a good reason not to.

Unfortunately, it's more complicated than that with joint bank accounts.  I don't think you should assume 50/50 but instead make sure that you have contemporaneous evidence to demonstrate it is 50/50 (or whatever the correct proportion is).

But if transferring money between spouses is completely tax free why can’t one give the other an amount of money that that person then decides to gift? It shouldn’t matter where it came from and what proportion of money going into a joint bank account comes from whom as once it’s there it’s shared ownership.

Notepad_Phil

poseidon1 said:

Linton said:

squirrelpie said:

Going from @stuart321's link to the contents at https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual makes me realise just how complicated the whole subject of inheritance is. Making gifts out of income seems fairly easy if you have a pretty fixed income, like my wife - state pension plus NHS pension plus little bits of interest. Then if her bank balance is increasing she can give away the surplus funds

But in my case I have state pension plus a small DB pension, plus a SIPP. The SIPP makes things more complicated because I choose how much income to take from it. And I also have an ISA that I can choose to take income from. How is it decided whether a withdrawal from my ISA is capital or income? Ditto for my SIPP, now.

Money in an ISA or a savings account is an asset so money taken from the ISA is not income. However I think that dividends and interest earned within the ISA in the current year could be regarded as income. How capital gains fit in I am not sure. I think a SIPP could be treated in the same way. But much of this could come within my previous advice that one should not try to be too clever. Keep things simple for your executor.

In my case all my ISA investments generate income the entirety of which is distributed out of the ISAs to me as  they arise. This is a mix of corporate bond interest, dividends from funds and shares and of course bank interest paid on cash ISAs. All are easily identified from statements and schedules produced by the investment platforms and banking institutions.

 Therefore if I were to commence a pattern of surplus income gifting, theses statements/schedules plus supporting bank statements would be maintained for reference by a future executor.

As regards Sipp income, that is easier. I will get an annual p60 from the sipp provider setting out how much of the UFPLSs constitute pension income taxed at source and for which I will have additional tax to pay thereon and therefore clearly part of the surplus income total after deducting any higher rate tax for the year.

Suggest   suirrelpie   have a read of the link below from a solicitor firm setting out points to bear in mind in considering gifts out of surplus income. Helpfully, in my view, they reccomend start with income that would be reported on your respective tax returns, and then ensure you include your non taxable ISA income  on top. 

https://www.gabyhardwicke.co.uk/briefing-notes-and-faqs/inheritance-tax-exemption-for-gifts-out-of-surplus-income/#:~:text=If you prepare income tax,gifts out of surplus income

Of course the key with regard to isa income in a stocks and shares isa, is you must have investments that actually payout income distributions, so clearly accumulation unit trusts, shares and etfs  that do not pay a dividend ( or interest) , will not work for that purpose. However anyone who is serious about utilising gifts out of surplus income exemption will be happy to make appropriate changes to their ISA portfolios to facilitate this.

How is your sipp drawdown structured?

I'd be worried that any drawdown by selling units would be seen by the hmrc as coming out of capital, but if you're using natural yield to generate the income (i.e. similar to your ISA) then taking that out would surely be okay to be truly counted as income by the hmrc - provided of course you keep the dividend etc records for your executor.

poseidon1

Notepad_Phil said:

poseidon1 said:

Linton said:

squirrelpie said:

Going from @stuart321's link to the contents at https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual makes me realise just how complicated the whole subject of inheritance is. Making gifts out of income seems fairly easy if you have a pretty fixed income, like my wife - state pension plus NHS pension plus little bits of interest. Then if her bank balance is increasing she can give away the surplus funds

But in my case I have state pension plus a small DB pension, plus a SIPP. The SIPP makes things more complicated because I choose how much income to take from it. And I also have an ISA that I can choose to take income from. How is it decided whether a withdrawal from my ISA is capital or income? Ditto for my SIPP, now.

Money in an ISA or a savings account is an asset so money taken from the ISA is not income. However I think that dividends and interest earned within the ISA in the current year could be regarded as income. How capital gains fit in I am not sure. I think a SIPP could be treated in the same way. But much of this could come within my previous advice that one should not try to be too clever. Keep things simple for your executor.

In my case all my ISA investments generate income the entirety of which is distributed out of the ISAs to me as  they arise. This is a mix of corporate bond interest, dividends from funds and shares and of course bank interest paid on cash ISAs. All are easily identified from statements and schedules produced by the investment platforms and banking institutions.

 Therefore if I were to commence a pattern of surplus income gifting, theses statements/schedules plus supporting bank statements would be maintained for reference by a future executor.

As regards Sipp income, that is easier. I will get an annual p60 from the sipp provider setting out how much of the UFPLSs constitute pension income taxed at source and for which I will have additional tax to pay thereon and therefore clearly part of the surplus income total after deducting any higher rate tax for the year.

Suggest   suirrelpie   have a read of the link below from a solicitor firm setting out points to bear in mind in considering gifts out of surplus income. Helpfully, in my view, they reccomend start with income that would be reported on your respective tax returns, and then ensure you include your non taxable ISA income  on top. 

https://www.gabyhardwicke.co.uk/briefing-notes-and-faqs/inheritance-tax-exemption-for-gifts-out-of-surplus-income/#:~:text=If you prepare income tax,gifts out of surplus income

Of course the key with regard to isa income in a stocks and shares isa, is you must have investments that actually payout income distributions, so clearly accumulation unit trusts, shares and etfs  that do not pay a dividend ( or interest) , will not work for that purpose. However anyone who is serious about utilising gifts out of surplus income exemption will be happy to make appropriate changes to their ISA portfolios to facilitate this.

How is your sipp drawdown structured?

I'd be worried that any drawdown by selling units would be seen by the hmrc as coming out of capital, but if you're using natural yield to generate the income (i.e. similar to your ISA) then taking that out would surely be okay to be truly counted as income by the hmrc - provided of course you keep the dividend etc records for your executor.

Ordinarily you would  only be concerned about the annual p60 issued by your sipp provider indicating what is reportable as taxable pension for income tax purposes. 

However flexi access Sipp withdrawals have been around long enough  for the more proactive sipp providers in the wealth management space to broach this question to HMRC.   abrdn is one such firm, and i attach below  a link to their synoposis on this subject back in 2018.

https://techzone.abrdn.com/public/iht-est-plan/gift-surplus-pension

As you will see, and perhaps surprisingly, HMRC have confirmed to abrdn ( I quote )

 ' ...that regular withdrawals from flexible pensions, irrespective of the levels withdrawn and whether taken as tax free cash or taxable income, always count as income for the purpose of the IHT exemption. '

However to be clear this only applies to regular UFPLSs. As abrdn points out, taking your 25% in one large up front lump sum ( rather than spread over years) , takes you back to normal iht principles relating to gifting capital lump sums.   

It is useful to know therefore, that your 25%  TFC if incorporated  in regular  UFPLSs attains the nature of income for the gifts out of income exemption, subject to all other criteria having been met.

Now that a Sipp pot will be liable to IHT in future, it will be interesting to see if HMRC changes its stance on the acceptance of flexi access drawdown as a legimate iht mitigation strategy using the gifts out of surplus income exemption.  Personally I see no reason why they should,  only a very small segment of the population would be able to afford to utilise it.

Sea_Shell

So if I understand this correctly, is this scenario correct?

Current Drawdown from SIPP set at the PA threshold with no tax payable. (before SP age)    TFLS already taken.
Annual average (evidenced) household expenses of £20,000pa*

Up the DD from the SIPP to £25,000 pa, pay 20% tax on the excess,  and then ensure that one regularly gifts (some of) the net excess £2,500.    Keep good records.

*How do you (can you) portion the HH expenses, 50/50 with spouse, or all of them if they are being paid from the DD, and currently topped up via other savings?


ETA - I can see how this would be beneficial for passing cash on to your kids or Gkids, but not so critical if leaving to, say, siblings or niblings.  They'll just have to 'suck up' 40% on the £5000 

squirrelpie

Thanks everybody. I now feel I have a much better grasp of the situation. Thanks especially to the two links poseidon1 posted.

Workerbee999

[Deleted User] said:

Workerbee999 said:

[Deleted User] said:

Linton said:

Each gift must be from an individual. If the gift comes from joint assets then assume 50/50 ownership unless there is a good reason not to.

Unfortunately, it's more complicated than that with joint bank accounts.  I don't think you should assume 50/50 but instead make sure that you have contemporaneous evidence to demonstrate it is 50/50 (or whatever the correct proportion is).

But if transferring money between spouses is completely tax free why can’t one give the other an amount of money that that person then decides to gift? It shouldn’t matter where it came from and what proportion of money going into a joint bank account comes from whom as once it’s there it’s shared ownership.

You can do what you like.  But the facts matter.  And I'm suggesting that contemporaneous evidence of the true facts is helpful.

Case law doesn't support an assumption that because money comes from a joint account then it is automatically 50/50.  If you want to get into the technicalities about joint bank accounts, the relevance of their terms and conditions and the underlying facts in a particular situation, it's easy enough to find a decision of the Judicial Committee of the Privy Counsel on it - google Whitlock Moree - but its much harder to get your head around it. 

It after that you want to discuss it from an IHT perspective then I'd be happy to do that - in short, it revolves around the facts and difference between a gift to a spouse and a disposition for IHT purposes (bearing in mind s5(2) IHTA).

Perhaps your facts are that it is treated as a 50/50 disposition for IHT purposes and it is so obvious that HMRC will not trouble your executors about any other possible interpretation?  

Thanks. So in our case I’ve probably made it quite messy as OH and I pass money between ourselves quite interchangeably, and actually although the comments were about joint bank accounts we didn’t actually use one. Since OH retired 4 months ago all “new money” comes from me ( he is not yet accessing any pension) but because I pay additional tax rate anything we now save (or have done previously) is passed to OH to keep in his name to reduce any tax on interest . Before the budget we decided to gift our son £12k, being £3k each for this year and last year. OH took it out of the savings in his name and sent it to my bank account. I then sent it all to our son - really just for ease as I have his account already set up as a payee. I did do it in 4 payments with the ref saying who it came from and which year it related to. So for IHT purposes would it be looked at as a gift from me (either due to originally being my earnings or because it ultimately came from my bank account), or a gift from OH as he took it out of savings in his name, or 50/50 as intended based on the payment descriptions used? 

And is there a better way to do it going forwards that isn’t so messy, that doesn’t involve keeping more savings in my name and unnecessarily paying more tax on the interest? Thanks