Pension tax free cash to ISA

Secret2ndAccount

Ciprico said:

Be very careful using the 7-year rule. Any gifts eat into your personal iht allowance of £325k before they become tax free.

Meaning you have to gift £325k first, (exhausting your iht allowance) then subsequent gifts are applicable to the 7 year rule.

Just making a gift and surviving 7 more years won't do it...!

Say what now?!?!?   I think you might be getting mixed up between the taper rule and the 7 yr rule. After 7 yrs the Potentially Exempt Transfer becomes an exempt transfer, and falls outside of IHT.

fuelcrusher

EdSwippet said:

fuelcrusher said:

I believe the rule is that the gifts must come from 'income' not capital. So I guess it hedges of whether ISAs are considered 'capital'.

The money you contribute to an ISA may or may not be "capital". However, any interest, dividends, or capital gains that occur within that ISA are potentially "surplus income". Also, the TFLS itself. From abrdn:

Certain income which isn’t subject to income tax, such as income from ISAs, may still be covered by the exemption. Also pension drawdown withdrawals, including any tax free cash element, are also treated as income for this purpose.
...

Some examples of allowable income include:

...
- regular withdrawals from flexible pensions, including any tax free cash element

- ISA income
...

So that implies it's possible to make the 'regular gifts from income' incorporating ISAs, it just may require a lot more effort being able to prove it. I'd imagine much simpler when it all comes from the pension.

fuelcrusher

gm0 said:

Gifting out of regular income.  Needs to demonstrate that there is excess income to gift from.  There is a whole and not pleasant IHT form about this very thing which drives ongoing record keeping on income and costs, bank statements etc. (IHT403).

Gifts of capital/savings as a one off such as 20k to a child for a house deposit - are subject to the 7 year taper rule to fall outside the estate.  But can just be done. (Potentially Exempt Transfer) and live 7 years and run down the clock.

PET not abolished yet.

Yes, that's why I can see it's easy to demonstrate when you have a surplus UFPLS amount each year, but harder to demonstrate when you're having to use ISAs, even if some of the ISA money did come from the pension. I was aware of a form but haven't checked it out yet.

Your second point regarding the 7 year rule. My plan was to use the gifts from regular income to keep the gifts out of the 7 year rule. I am aware that to comply they not only need to come from income but need to be 'regular', so one off gifts for a house deposit wouldn't fit the rule.

I've seen the 'gifts from regular income' appear often now on youtube videos. I'd imagine it'll become more popular as people realise it will allow them to reduce IHT at the same time as seeing their children benefit from the cash younger.

fuelcrusher

Ciprico said:

Be very careful using the 7-year rule. Any gifts eat into your personal iht allowance of £325k before they become tax free.

Meaning you have to gift £325k first, (exhausting your iht allowance) then subsequent gifts are applicable to the 7 year rule.

Just making a gift and surviving 7 more years won't do it...!

My question was regarding using ISAs to gift regularly and keep them out of the 7 year rule completely.

RogerPensionGuy

Reference gifting out of regular income that is above spending needs.

An idea that may work, just an example.

Use 400K from SIPP in one shot, 100K TFLS and buy a single annuity 300K, maybe for a period of say 15/20 years or end of life with a guarantee period and name kidds to collect if death before period, all this can be trimmed to achieve approximately net regular income not needed or called surplus. I guess helpful if kidds are not employed/homemaker ref tax if annuity holder dies early on.

IHT has been stuck at 325K and looks like inflation will make IHT a nice growing revenue for HMRC so worth watching this. I am still amazed that a person who rents a house only has 325K IHT, but a house owner can have 500K, crazy.

Same subject, lots of press about currently about letting people take a years state pension at say 40 years old in a lump and they defer their state pension plus one year so they can buy a house, also changing house lending rules to allow people to gear up even more debts, another first time buyer scheme and anything else to increase house price inflation, pumping up house prices is good for getting people in more debts, more SDLT, more bills, re-value council tax, push more estates in to IHT zones.

So anyone wanting to pass on more net wealth to others will certainly be looking at venting SIPPs a lot more quickly in this next period and gifting out of surplus income looks a reasonable choice.

artyboy

With the IHT changes to pensions, then quite likely that Mrs Arty and I will both take out well above the annual £50k/£66.6k (depending on TFLS plans) than we had originally planned from our SIPPs, and gift the surplus. 

Yes, 40% tax, but the least worst option (possibly aside from expatriating), especially if we can get our estate below the £2m mark where IHT taper kicks in.