Gifts out of income for IHT purposes

idaNt357

Hi there,
I am 75 yers old and up
until last year had an unchrystalised defined contribution pension policy written in trust for my family - wife, daughter, grandchildren and siblings. The pension company informed me that the policy would end at age 75 and as I did not want to take an annuity I transferred the funds to my SIPP. I then took the 25% maximum tax free cash out of the funds and distributed this amongst the original beneficiaries and kept some myself. I then wrote the remaining 75% of the funds in trust for the same beneficiaries as above.
My question is whether the tax free cash will be considered as income for IHT403 purposes in which case the amounts gifted will be covered by the IHT exemption for regular expenditure out of income.
If the 25% is regarded as capital, will the gifts be regarded as capital and not made out of income on the basis that the intention has always been that the beneficiaries will receive the pension fund and all that has happened is that they have had a payment on account which was my intention especially as my siblings are getting older. I have copies of documentation with the pension fund and DIPP showing that the fund are written in trust.
what do you think?

ader42

I take it the gifts were not “regular”, for example a set amount each month and ongoing?

In which case I suspect that no the gifting out of excess income exemption will not be applied.

Additionally i don’t think a single lump sum such as the 25% would be considered income either. 

poseidon1

See below an extract from a large financial services company article with regard to IHT 403 gifts from surplus income  and sipp 25% tax free cash.


'' Other conditions

But it is important to remember that the gifts still have to satisfy two additional conditions.

Firstly, the gifts have to be part of normal expenditure. Taking the full 25% tax free cash entitlement and giving it away is a one-off gift. The exemption clearly will not apply and the gift will be a potentially exempt transfer. There has to be an established pattern of gifting. Spreading the gifting of tax free cash over a number of years using a phasing strategy, so that all the tax free cash is taken by the client's 75th birthday, is a better option. ''


See further below a link to the article itself for greater insight on this matter.

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


Finally, and if you have the time and patience to spare see below link to an extensive MSE thread on the intricacies and significant challenges involved in planning and implementing an ultimately successful 'gifts out of excess income' strategy to the satisfaction of HMRC. 

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

Keep_pedalling

It will all be classed as a PET with the exception of your annual allowance and whatever amount you gave to your wife. Gifts to a spouse don’t really work as far as IHT mitigation is concerned.

incus432

idaNt357 said:

My question is whether the tax free cash will be considered as income for IHT403 purposes in which case the amounts gifted will be covered by the IHT exemption for regular expenditure out of income.
If the 25% is regarded as capital, will the gifts be regarded as capital and not made out of income on the basis that the intention has always been that the beneficiaries will receive the pension fund and all that has happened is that they have had a payment on account which was my intention especially as my siblings are getting older. I have copies of documentation with the pension fund and DIPP showing that the fund are written in trust.
what do you think?

https://dfmadvice.co.uk/does-it-make-sense-to-gift-surplus-pension-income/

This states that any TFLS also counts as income for this purpose

DRS1

The key words in that quote are "regular withdrawals".  A one off payment of the 25% TFLS would not qualify.  UFPLS payments on the other hand would qualify.  Probably.