Gifting from income - status of ISA income

incus432

I am considering setting up regular gifting to adult son (have been making one off gifts for some years - fine as long as the 7 year exemption is met. I understand most of the rules I think - excess income, regular payments, good records. I don't use all my current income and have stopped drawing on my SIPP to avoid paying 40% tax.

What I don't know is the status of income from an (S&S) ISA. Say I set up a bond ladder to give me another £5k a year for 10 years (renewable then probably) and gifted that amount. That would be income into my bank account but within the ISA it is made up of part capital part interest.  Is that a problem with HMRC? Would they ever want to look into the mechanics of the ISA to see how the income arriving in my bank account was generated?

I found this useful internal HMRC guide which is ambiguous (one of the s/s below suggests they wouldn't) , but I'd be grateful if anyone has more knowledge or thoughts on this

https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm14250

IHTM14250 - Lifetime transfers: conditions for normal out of income exemption: out of income

Keep_pedalling

All interest and dividends within an ISA is income. 

Linton

There is nothing more definitive than the HMRC tax manuals.  Any lack of clarity would be resolved if the situation ever came to court, which as far as I know the exact definition of income never has.

I would have thought it pretty obvious that dividends and interest are income and capital growth is capital whether it's in an ISA or not.  In theory your executor may have to justify that your total gifts from income are genuine by reference to the details of the ISA and would therefore have to distinguish between a gilt ladder income from interest and a gain from capital growth (eg you bought the gilt at less than par and sold at maturity).

DavidT67

Money withdrawn from an S&S ISA will consist of return of capital, capital gained, plus dividends and interest received.  

Only the element from dividends and interest received would be considered income. 

Oh, and have fun working out the reinvested dividend and ERI component of accumalating funds cashed out !

MSE_ForumTeam5

We've merged the two threads

poseidon1

incus432 said:

I am considering setting up regular gifting to adult son (have been making one off gifts for some years - fine as long as the 7 year exemption is met. I understand most of the rules I think - excess income, regular payments, good records. I don't use all my current income and have stopped drawing on my SIPP to avoid paying 40% tax.

What I don't know is the status of income from an (S&S) ISA. Say I set up a bond ladder to give me another £5k a year for 10 years (renewable then probably) and gifted that amount. That would be income into my bank account but within the ISA it is made up of part capital part interest.  Is that a problem with HMRC? Would they ever want to look into the mechanics of the ISA to see how the income arriving in my bank account was generated?

I found this useful internal HMRC guide which is ambiguous (one of the s/s below suggests they wouldn't) , but I'd be grateful if anyone has more knowledge or thoughts on this

https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm14250

IHTM14250 - Lifetime transfers: conditions for normal out of income exemption: out of income

There is a long and extensive thread on the pensions forum which covers pretty much every aspect of the gifts out of excess income iht exemption, including your query - see link below

https://forums.moneysavingexpert.com/discussion/comment/81126919#Comment_81126919

Suggest you have a read through the entirety of that, rather than for this new thread  rehashing ground which has already been extensively covered.  

My observation on 24 November at 11.00pm  might be helpful. Also as one of the few Forumites to actually make a successful claim for this exemption for a deceased person, Linton's responses at      26 November (2.37pm)   and  27 November ( 11.55am)  maybe especially illuminating.

incus432

Thank you Poseidon1, will do.  I believe I already have excess income, I just need to be able to prove it so have started a breakdown of income and expenditure over the last couple of years. The extra income stream was potentially just a simpler way of showing it - in and out of my account. 

incus432

I note from that thread a lot of debate about how to assess expenditure from joint accounts and no clear conclusions apart from do it conservatively to give a lower surplus income figure.

Other questions I have in trying to calculate 'normal expenditure' 

Should you count a regular annual £2880 contribution to your own SIPP?  

What about the parental contribution to son's university maintenance (has been 6 to 8k pa)? That is expected/essential as the SFE maintenance loan is well below living costs - is that 'normal expenditure' or (because time limited) not? Or is a 'gift' that could fall into the 7 year rule?

silvercar

incus432 said:

I note from that thread a lot of debate about how to assess expenditure from joint accounts and no clear conclusions apart from do it conservatively to give a lower surplus income figure.

Other questions I have in trying to calculate 'normal expenditure' 

Should you count a regular annual £2880 contribution to your own SIPP?  

What about the parental contribution to son's university maintenance (has been 6 to 8k pa)? That is expected/essential as the SFE maintenance loan is well below living costs - is that 'normal expenditure' or (because time limited) not? Or is a 'gift' that could fall into the 7 year rule?

I would argue that paying termly for 3 years would be a regular payment, so the only question is whether it is out of normal income or from savings.

Keep_pedalling

Not sure if parental contribution for university fees is gifting as it is something that is required by the state, so I think that is also normal expenditure.

I also think contributions to a SIPP are expenditure as the contributions are treated as coming from income and receive tax relief as a result. As SIPPS are being brought within the scope of IHT in 2027 so as it seems you are already in IHT territory you should maybe consider stopping those and gifting the money yourself.  

incus432

Interesting. In that case parental contributions couldn't be treated as gifts that could fall into IHT liability, and presumably the 3k annual allowance would be ok on top of that.

In terms of the SIPP my current plan is to continue to contribute for my OH to use for drawdown or annuitise after I'm gone (and only pay basic rate tax). Gifting the amount (or more) regularly to son is another option though.