Normal expenditure out of income.

masonic

poseidon1 said:

slinger2 said:

enthusiasticsaver said:

If it is out of taxed income then there is no limit. Income would be pensions/salary, rent from property. Executors would need to see the gifts are excess income rather than from savings/investments. 
There is no tax to pay by beneficiaries. 
Yes  you should really keep records and maybe do an annual letter to say this money is gifted from excess income. 
You can still gift £3k out of savings etc. 

Per IHT403 page 8, income includes "Interest (including PEPs and ISAs)". So although the gifts can't be from savings/investments they can be from the income (interest) generated from those savings/investments.

But not if ISA income is accumulated  ( within the ISA ) rather than paid out to the investor each year. 

Where does it say that? It seems a very strange distinction to make that it is only income if it is received into a different account than the principal. I don't think HMRC would fall for that if it were a taxable savings account. Likewise, I cannot see them making a special exception for ISAs when the form explicitly includes them.

poseidon1

masonic said:

poseidon1 said:

slinger2 said:

enthusiasticsaver said:

If it is out of taxed income then there is no limit. Income would be pensions/salary, rent from property. Executors would need to see the gifts are excess income rather than from savings/investments. 
There is no tax to pay by beneficiaries. 
Yes  you should really keep records and maybe do an annual letter to say this money is gifted from excess income. 
You can still gift £3k out of savings etc. 

Per IHT403 page 8, income includes "Interest (including PEPs and ISAs)". So although the gifts can't be from savings/investments they can be from the income (interest) generated from those savings/investments.

But not if ISA income is accumulated  ( within the ISA ) rather than paid out to the investor each year. 

Where does it say that? It seems a very strange distinction to make that it is only income if it is received into a different account than the principal. I don't think HMRC would fall for that if it were a taxable savings account. Likewise, I cannot see them making a special exception for ISAs when the form explicitly includes them.

HMRC general presumption ( with the odd exception ) that income accumulated beyond 2 years is capitalised. See below very useful article and the sub heading 'made out of income'

https://www.taxadvisermagazine.com/article/normal-expenditure-out-income-exemption

Admittedly pretty arbitrary, but as the article above and the  thread below from the pensions forum illustrate, there is much about this exemption which is arbitrary with the burden  placed upon the poor beknighted executor to prove the case on behalf of the deceased estate. 

https://forums.moneysavingexpert.com/discussion/comment/81082770#Comment_81082770?utm_source=community-search&utm_medium=organic-search&utm_term=gifts+out+of+income+poseidon1

A testator can certainly use the IHT 403 as guidance to help construct a template to support a gifts out of surplus income exemption claim, but they need to be cognizance of the many nuances, interpretations and case law that lies behind the exemption, that are not immediately apparent from  the terms of the IHT form itself. As always devil is in the detail. With this exemption the detail is extensive.

masonic

Ok, so maybe I misinterpreted what you wrote. The scenario being discussed here is payment from excess income received into a cash ISA. The implication being that this surplus income is gifted in the same tax year that it is received. I agree that if someone is thinking of going back into their historic earnings and saying they had surplus income that they now want to gift using the exemption, that is a minefield.

An executor ought to be on fairly safe ground if they are able to identify (1) a total income in each tax year that (2) exceeds the total expenditure of the individual by at least the amount gifted and (3) statements showing sufficient income being paid into the account(s) from which the gifts are made. That would require statements of the ISA showing prompt withdrawal of interest, but I don't think this would necessitate a direct pay-away by the provider (which most cash ISAs would not offer).

If someone were to wait 2 years to make the gift, I would think it would be their income and expenditure in that later tax year which would dictate whether the gift was from surplus income. If they didn't have any surplus income in that year to match to the gift, they'd be on very shaky ground.

poseidon1

masonic said:

Ok, so maybe I misinterpreted what you wrote. You seem to be referring to HMRC's 2 year rule of thumb as described in the article you linked. The article also covers withdrawals from onshore or offshore bonds, which would be capital.

The scenario being discussed here is payment from excess income received into a cash ISA. The implication being that it is gifted in the same tax year that it is received.

An executor ought to be on fairly safe ground if they are able to identify (1) a total income in each tax year that (2) exceeds the total expenditure of the individual by at least the amount gifted and (3) statements showing sufficient income being paid into the account(s) from which the gifts are made. That would require statements of the ISA showing prompt withdrawal of interest, but I don't think this would necessitate a direct pay-away by the provider (which most cash ISAs would not offer).

If someone were to wait 2 years to make the gift, I would think it would be their income and expenditure in that tax year which would dictate whether the gift was from excess income. If they didn't have any surplus income in that year to match to the gift, they'd be on very shaky ground.

You will see from my post in the mse thread supplied, all my isa providers ( Cash and S & S ) were specifically selected on the basis of automated pay outs of interest /dividends/coupons, etc. 

I was generally of the view that any one serious in pursuing use of this exemption would be happy to arrange their affairs to best assist  their executor's with this thankless task. 

Having professionally assisted executors in the past, in untangling the financial affairs of deceased teststors for IHT reporting purposes, acutely aware of the need to establish coherent paper trails.

masonic

I don't think it necessarily follows that a pay-away arrangement makes it easier on the executor. It somewhat depends on what these transactions would look like in the destination bank account vs another type of withdrawal, but I'd think it would be necessary to go back to documents relating to the source account to verify that the transactions were indeed income. That's before considering whether they were surplus income.

I suppose if one were to be fastidious about it, an ideal option would be to have one bank account exclusively used to receive all income from your various sources and no other inward payments. Then this account is used to make outgoing payments to a second account which in turn is used for the individual's own expenditure. Anything left over could be used to make gifts at the end of the tax year. If capital is spent at any point in the tax year, then this must be fully replenished from the income account in order to make any potentially exempt gifts. This along with supporting documentary evidence would be invaluable.

EthicsGradient

A question for which the answer doesn't seem immediately obvious from the HMRC pages: would contributions to a SIPP be counted as part of the "normal expenditure for living", or could the giver say "I fund my SIPP out of capital, and therefore I have more of of my income available for gifts"?

eg
Income after tax and NI £30k; general expenditure £20k; contribution to SIPP £8k. Does that leave only £2k for gifts, or can you take £8k capital from savings or investment, and say "I have £10k for gifts"?

coyrls

My understanding is that it wouldn't make any difference, as you would have to subtract payments from capital from your income, but perhaps I have got that wrong.  It's certainly a confusing area.

masonic

It may depend on whether you are at an age when you can access your SIPP.

EthicsGradient

masonic said:

It may depend on whether you are at an age when you can access your SIPP.

Is that a guess, or has HMRC said something to imply that? Are you saying that before the age you can access it, it's "necessary" expenditure, but after that it's a voluntary investment?

I can see that an employee's minimum pension contribution would be a necessary expenditure, and since it could be hard to disentangle payments, they might well say all employee contributions to a workplace pension would be treated like that. And you might then argue that, for fairness, contributions to personal pensions should count like that too. But in many ways it's just a different investment, as ISAs (and Lifetime ISAs, with a government contribution) are.

masonic

EthicsGradient said:

masonic said:

It may depend on whether you are at an age when you can access your SIPP.

Is that a guess, or has HMRC said something to imply that? Are you saying that before the age you can access it, it's "necessary" expenditure, but after that it's a voluntary investment?

I can see that an employee's minimum pension contribution would be a necessary expenditure, and since it could be hard to disentangle payments, they might well say all employee contributions to a workplace pension would be treated like that. And you might then argue that, for fairness, contributions to personal pensions should count like that too. But in many ways it's just a different investment, as ISAs (and Lifetime ISAs, with a government contribution) are.

Nothing more than a guess, and an indefinite one at that. My rationale is that pension contributions that have received tax relief are treated as being made from earnings, and cannot be made without those earnings. If you cannot access the money for 2 years after earning it, it would seem that HMRC's capitalisation rules would kick in. However, if you are able to withdraw from the pension before that and gift the proceeds, then you can beat that capitalisation event, and would need to make the necessary drawdown to fund the gifts to be able to match it to the original income. This may be a stricter interpretation than is required, but as a non-expert I would err on the side of caution.

So what of money paid into a pension via salary sacrifice by your employer? Who knows. HMRC tend to pretend it doesn't exist in most respects.

I imagine the cohort of interested parties in this scenario must be quite small, given most in this position would be able to outlive the taper relief on gifts made in their early fifties or earlier.