Gifts from Income-is this acceptable?

Majic

Would income drawn from Pensions (25% drawdown or regular drawdowns which are taxed on) be classed as Income or Capital. For the purpose of giving away the surplus under the gifts from income loophole we are discussing.

I have seen comments online suggesting it is Income but also seen the odd comment suggesting it is Capital.

Any thoughts folks?

DRS1

By 25% drawdown do you mean the tax free lump sum?

I think I have seen something saying that can be treated as income if it is part of a regular drawdown - ie where you draw an amount which is 25% lump sum and 75% taxable pension at the same time on a regular basis (UFPLS?).  So where you are using up the lump sum element in chunks over a period of years. I think it may be different if you took the full available tax free lump sum in one go when you commence drawdown (FAD?).

Linton

Majic said:

Trying to come up with a plan that would satisfy HMRC. Would this be acceptable?

A person each tax year keeps a spreadsheet of Income and all Expenditure. This would be a summary of the ins/outs of their bank account as that would be everything. Then in Week 52 of tax year, any balance is gifted to dependents.

Same in year 2. etc.

Obviously balance may vary from year to year, but accurate records would show the net amount available at the end of each year.

This is allowed.  There was a case (Bennett and others vs IRC) where a lady did exactly this, HMRC objected, and the judge ruled that making gifts based on unused income at the time did in fact meet the requirements for Gifts From Income as the same process was adopted regularly every year.

See:https://www.mandg.com/wealth/adviser-services/tech-matters/iht-and-estate-planning/exemptions-and-relief/normal-expenditure-out-of-income#case-law

fuzzzzy

To the OP, as well as keeping your spreadsheet it would also be a good idea to download form IHT403 and fill in page 8 every year for your executors.

https://assets.publishing.service.gov.uk/media/5f60b44cd3bf7f7234487bf0/IHT403-05-20.pdf

Robert_McGeddon

Majic said:

Trying to come up with a plan that would satisfy HMRC. Would this be acceptable?

A person each tax year keeps a spreadsheet of Income and all Expenditure. This would be a summary of the ins/outs of their bank account as that would be everything. Then in Week 52 of tax year, any balance is gifted to dependents.

Same in year 2. etc.

Obviously balance may vary from year to year, but accurate records would show the net amount available at the end of each year.

I'm struggling with this.  YES to keeping a spreadsheet of Income and all Expenditure but NO to that being the net of ins/outs in your bank account.  It seems to me that you're mixing up income/expenditure with cash flow.  Even excluding the odd unusual transaction on your bank account you won't magically turn cash flow into income/expenditure unles your finances are incredibly simplistic.

Example: You have £10,000 dividends each year in an ISA but you let it accumulate rather than withdraw it.  No inflow to your bank statement but there's £10K worth of income that would count in the 'Gifts Out Of Income' calculation.  This particular example would work in your favour.