Pension income and annual £3,000 gift allowance

PowerSavingMode

I had no idea until I read recently that every year we have an annual £3,000 gift allowance and there is no tax due on any gifts made seven or more years before we die. Better still, we can also make regular gifts from excess income — so, for example, if my SO takes more than they need from their pension, they can give that away tax-free.

Does that mean my SO — with no paid employment and no state pension (not for a few years yet) — can withdraw £3K from their private pension (SIPP), gift it to me, and neither of us will pay tax on this? If so, how does that work, please?

Dazed_and_C0nfused

PowerSavingMode said:

I had no idea until I read recently that every year we have an annual £3,000 gift allowance and there is no tax due on any gifts made seven or more years before we die. Better still, we can also make regular gifts from excess income — so, for example, if my SO takes more than they need from their pension, they can give that away tax-free.

Does that mean my SO — with no paid employment and no state pension (not for a few years yet) — can withdraw £3K from their private pension (SIPP), gift it to me, and neither of us will pay tax on this? If so, how does that work, please?

The income taken from the pension will be either,

£3,000 TFLS
£750 TFLS and £2,250 taxable income
£3,000 taxable income

If they have no other taxable income of any sort in the tax year they take money out of the pension then they wouldn't have any tax to pay in any of the taxable pension income.

The pension company might deduct some tax when making the payment but it would all be refunded by HMRC in due course.

Aretnap

Gifts in the UK are not taxable. You (or your SO) can gift as much money as you like to anyone you like and it is no business of the taxman's at all.

The one exception to this principle is that if you die within 7 years of making a gift, it can still count as part of your estate for inheritance tax purposes, basically to stop people avoiding inheritance tax by giving away everything they own on their death beds. Obviously this need only concern you if (a) you are rich enough to have to worry about inheritance tax in the first place (most people aren't) and (b) you are likely to die in the next seven years (hopefully not if you are several years off drawing your state pension). 

Are you and your SO married or in a civil partnership? If so, there is also no need to worry about inheritance tax on anything that you either gift or leave each other, however rich you are and whenever you die. If not, and if IHT is a concern, then consider getting married - it's by far the most foolproof way of avoiding IHT (that or spending all your money on nice things).

So before you start worrying about annual £3000 allowances and surplus income, consider whether inheritance tax is something that you actually have to worry about in the first place. There are lots of reasons why it might not be.

PowerSavingMode

Dazed_and_C0nfused said:

PowerSavingMode said:

I had no idea until I read recently that every year we have an annual £3,000 gift allowance and there is no tax due on any gifts made seven or more years before we die. Better still, we can also make regular gifts from excess income — so, for example, if my SO takes more than they need from their pension, they can give that away tax-free.

Does that mean my SO — with no paid employment and no state pension (not for a few years yet) — can withdraw £3K from their private pension (SIPP), gift it to me, and neither of us will pay tax on this? If so, how does that work, please?

The income taken from the pension will be either,

£3,000 TFLS
£750 TFLS and £2,250 taxable income
£3,000 taxable income

If they have no other taxable income of any sort in the tax year they take money out of the pension then they wouldn't have any tax to pay in any of the taxable pension income.

The pension company might deduct some tax when making the payment but it would all be refunded by HMRC in due course.

Thank you for your quick response.

So, if my SO withdraws up to the Personal Allowance for this tax year (£12,570), tax free, then they can also withdraw a further £3,000 to gift to me and this will also be tax free?

PowerSavingMode

Aretnap said:

Are you and your SO married or in a civil partnership? If so, there is also no need to worry about inheritance tax on anything that you either gift or leave each other, however rich you are and whenever you die. If not, and if IHT is a concern, then consider getting married - it's by far the most foolproof way of avoiding IHT (that or spending all your money on nice things).

No. We've been together so long, the time has definitely passed for any wedding bells! 

Dazed_and_C0nfused

PowerSavingMode said:

Dazed_and_C0nfused said:

PowerSavingMode said:

I had no idea until I read recently that every year we have an annual £3,000 gift allowance and there is no tax due on any gifts made seven or more years before we die. Better still, we can also make regular gifts from excess income — so, for example, if my SO takes more than they need from their pension, they can give that away tax-free.

Does that mean my SO — with no paid employment and no state pension (not for a few years yet) — can withdraw £3K from their private pension (SIPP), gift it to me, and neither of us will pay tax on this? If so, how does that work, please?

The income taken from the pension will be either,

£3,000 TFLS
£750 TFLS and £2,250 taxable income
£3,000 taxable income

If they have no other taxable income of any sort in the tax year they take money out of the pension then they wouldn't have any tax to pay in any of the taxable pension income.

The pension company might deduct some tax when making the payment but it would all be refunded by HMRC in due course.

Thank you for your quick response.

So, if my SO withdraws up to the Personal Allowance for this tax year (£12,570), tax free, then they can also withdraw a further £3,000 to gift to me and this will also be tax free?

No, you are conflating two things.

If SO has taxable pension income of £15,570 then they will liable to basic rate tax on £3,000 of that (or £4,260 of it if they have applied for Marriage Allowance).

If SO chooses to give £3,000 of it to someone else it makes no difference to SO's income tax liability.

PowerSavingMode

Dazed_and_C0nfused said:

PowerSavingMode said:

Dazed_and_C0nfused said:

PowerSavingMode said:

I had no idea until I read recently that every year we have an annual £3,000 gift allowance and there is no tax due on any gifts made seven or more years before we die. Better still, we can also make regular gifts from excess income — so, for example, if my SO takes more than they need from their pension, they can give that away tax-free.

Does that mean my SO — with no paid employment and no state pension (not for a few years yet) — can withdraw £3K from their private pension (SIPP), gift it to me, and neither of us will pay tax on this? If so, how does that work, please?

The income taken from the pension will be either,

£3,000 TFLS
£750 TFLS and £2,250 taxable income
£3,000 taxable income

If they have no other taxable income of any sort in the tax year they take money out of the pension then they wouldn't have any tax to pay in any of the taxable pension income.

The pension company might deduct some tax when making the payment but it would all be refunded by HMRC in due course.

Thank you for your quick response.

So, if my SO withdraws up to the Personal Allowance for this tax year (£12,570), tax free, then they can also withdraw a further £3,000 to gift to me and this will also be tax free?

No, you are conflating two things.

If SO has taxable pension income of £15,570 then they will liable to basic rate tax on £3,000 of that (or £4,260 of it if they have applied for Marriage Allowance).

If SO chooses to give £3,000 of it to someone else it makes no difference to SO's income tax liability.

Ah, I see. Yes, seem to have confused myself with the IHT element. I read the article, which stated "Every year you have an annual £3,000 gift allowance and there is no tax due on any gifts made seven or more years before you die," and assumed it also applied to income tax. Thank you for clarifying.

Secret2ndAccount

You cannot avoid income tax by giving the money away (well, possibly by giving it to charity, but not to you).

Has SO already taken the 25% tax free lump sum from her pension? If so, then future withdrawals are all taxable, so £12,570 is the max per year before the 20% rate kicks in. If not, she can withdraw £16,000. The first 25% is tax free (£4,000). The remaining £12,000 is taxable, but below her threshold, so no tax to pay. The magic number is £16,760 with no tax to pay. So it's possible she can pull out more from her pension anyway.

There is never any tax to pay on gifts. If I have 50k in my bank account, I can give you 30k and nobody pays any tax. The only time these gifts might take on some relevance for tax is after the giver dies. Gifts given up to 7 years before dying may be included in the total value of a person's estate. So, if the estate is large, there could be inheritance tax to pay as a result of the gift.
Person A gifting money to Person B never generates a tax bill and never avoids a tax bill. An inheritance tax bill could arise if Person A dies within 7 years.

powerspowers

PowerSavingMode said:

Aretnap said:

Are you and your SO married or in a civil partnership? If so, there is also no need to worry about inheritance tax on anything that you either gift or leave each other, however rich you are and whenever you die. If not, and if IHT is a concern, then consider getting married - it's by far the most foolproof way of avoiding IHT (that or spending all your money on nice things).

No. We've been together so long, the time has definitely passed for any wedding bells! 

Fair enough, but do check what that means for pensions, property, tax, inheritance etc. 
i wasn’t going to get married again but realised that my partner would be £100k better off and would get half my pension if we were married.  A lot of people assume that they have “common law” rights when they’ve been together a long time and are shocked when it’s too late. 

Aretnap

powerspowers said:

PowerSavingMode said:

Aretnap said:

Are you and your SO married or in a civil partnership? If so, there is also no need to worry about inheritance tax on anything that you either gift or leave each other, however rich you are and whenever you die. If not, and if IHT is a concern, then consider getting married - it's by far the most foolproof way of avoiding IHT (that or spending all your money on nice things).

No. We've been together so long, the time has definitely passed for any wedding bells! 

Fair enough, but do check what that means for pensions, property, tax, inheritance etc. 
i wasn’t going to get married again but realised that my partner would be £100k better off and would get half my pension if we were married.  A lot of people assume that they have “common law” rights when they’ve been together a long time and are shocked when it’s too late. 

And it doesn't have to involve wedding bells - if you're not sentimental a quick trip to the register office with a couple of witnesses can potentially save a lot of worry and money should something unexpected happen to one of you. 

I think others have explained it well but just to be clear when I say gifts are not taxable I mean that you don't have to pay any tax just because you have made a gift and the recipient doesn't have to pay any tax just because they've received one. I didn't mean that gifting money retrospectively means that the income tax that you paid when you first earned it, or withdraw it from your pension or whatever no longer applies. (Well not a gift to a person anyway; gifts to charity can qualify for tax relief in some circumstances.)

LHW99

Gifts in the UK are not taxable.

Bear in mind that is the current position...........