Gifting from Income and what is classed as Income

Hal17

I am trying to understand exactly what I include as Income when working out "Gifting from Income" numbers.

I want to maximise my income  using my 20% tax band up to £50,271.

I currently draw a state pension and some small DC pensions. I use interest from cash ISA's and savings accounts to supplement living costs. I have a large DC pot which now I intend to drawdown, both to spend and gift to family.

What I am trying to achieve is an estimate of what I currently receive from various sources, and then work out what I need to drawdown so I do not exceed the £50,271 limit.

For example, I take £3K as Capital gains allowance (hence no tax), so do I include this as income? Appreciate your feedback.
 

Keep_pedalling

Capital gains is not income.

Hal17

Thank you Keep_pedalling, I knew you would be the first to reply. 

So I am going to use pension income, savings interest and dividend payments to work out the total required.

Keep_pedalling

What I don’t know is how income from a DC pension is treated regarding gifts from excess income because it would be possible to manipulate the withdrawals to increase your income beyond sustainable rates just to pass the lot on. 

HappyHarry

Income drawn from DC pensions can be counted as income for gifting purposes, unless any tax experts think otherwise?

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

What counts as 'income' from a flexible pension?

Flexi-access drawdown, (where there are no limits on what can be taken and withdrawals can be taken as combination of tax free cash and taxable income), gives significant scope to take withdrawals tax efficiently.

When it comes to gifting those withdrawals, the IHT rules also help here. The 'normal expenditure out of income' exemption doesn't use the income definition used for income tax purposes. As income is not defined in the IHT Act, it follows normal accountancy practice to determine what is income.

HMRC have confirmed to us that regular withdrawals from flexible pensions, irrespective of the levels withdrawn and whether taken as tax free cash or taxable income, always count as income for the purpose of the IHT exemption. This creates an opportunity for at least 25% of the pension fund to be taken and gifted both income tax and IHT free.

Notepad_Phil

HappyHarry said:

Income drawn from DC pensions can be counted as income for gifting purposes, unless any tax experts think otherwise?

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

....

I was about to post the same link as it came up on a post about IHT a few days or so ago, but with an added note that the article is from 2018 and now that pension pots are coming into the inheritance tax net that I wouldn't be surprised if the HMRC change their mind at some time in the future on how much money can be extracted without it being counted as depletion of capital. I.e. in the same manner as would happen if you were taking money out of a S&S ISA or a normal Investment Account.

Ciprico

Also raises the interesting notion of taking £2.8k out of ISA (or savings), putting it into a SIPP, and potentially gifting £3.6k as tax free gift every year .....