Normal expenditure out of income.

poseidon1

masonic said:

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.

In keeping with HMRC's arbitrary rules concerning the intricacies of this relief, in terms of Sipp outflows UFPLSs as well the usual taxable income element are all counted as 'income' in looking at a deceased's surplus income calculation ( regular Tax free cash therefore transformed into income).

Reliance is placed on specific clarification obtained by  abdrn direct from HMRC when queried on this point - see my post on 3 November in the thread below - 

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

The thread was a spin off from a number of threads in the pensions forum discussing the impact of proposed future IHT on pension pots in 2027.

For those who were wealthy enough and had originally planned to leave their pension pots  (untouched) to children IHT free, the current ability to flexi access the pot and give away those monies IHT free predeath ( via regular UFPLSs) may now seem more appealing.

masonic

poseidon1 said:

masonic said:

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.

In keeping with HMRC's arbitrary rules concerning the intricacies of this relief, in terms of Sipp outflows UFPLSs as well the usual taxable income element are all counted as 'income' in looking at a deceased's surplus income calculation ( regular Tax free cash therefore transformed into income).

Reliance is placed on specific clarification obtained by  abdrn direct from HMRC when queried on this point - see my post on 3 November in the thread below - 

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

The thread was a spin off from a number of threads in the pensions forum discussing the impact of proposed future IHT on pension pots in 2027.

For those who were wealthy enough and had originally planned to leave their pension pots  (untouched) to children IHT free, the current ability to flexi access the pot and give away those monies IHT free predeath ( via regular UFPLSs) may now seem more appealing.

Good point. So there is no ambiguity if you can access it, and do, providing it is surplus to your needs in the relevant tax year. So it would seem to make sense that just as the income is deferred for tax purposes, so would your ability to gift it. Subject of course to paying tax on it at your marginal rate when it is taken out as income and gifted.

Coming back to the scenario of "Income after tax and NI £30k; general expenditure £20k; contribution to SIPP £8k [leaving it there]". In no way does that support saying "I have £10k [surplus income] for gifts". Otherwise, why not say "I have £10k surplus income for gifts before I pull the money out of my SIPP, and then another £8k after I pull it out, totalling £18k"?

EthicsGradient

masonic said:

poseidon1 said:

masonic said:

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.

In keeping with HMRC's arbitrary rules concerning the intricacies of this relief, in terms of Sipp outflows UFPLSs as well the usual taxable income element are all counted as 'income' in looking at a deceased's surplus income calculation ( regular Tax free cash therefore transformed into income).

Reliance is placed on specific clarification obtained by  abdrn direct from HMRC when queried on this point - see my post on 3 November in the thread below - 

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

The thread was a spin off from a number of threads in the pensions forum discussing the impact of proposed future IHT on pension pots in 2027.

For those who were wealthy enough and had originally planned to leave their pension pots  (untouched) to children IHT free, the current ability to flexi access the pot and give away those monies IHT free predeath ( via regular UFPLSs) may now seem more appealing.

Good point. So there is no ambiguity if you can access it, and do, providing it is surplus to your needs in the relevant tax year. So it would seem to make sense that just as the income is deferred for tax purposes, so would your ability to gift it. Subject of course to paying tax on it at your marginal rate when it is taken out as income and gifted.

Coming back to the scenario of "Income after tax and NI £30k; general expenditure £20k; contribution to SIPP £8k [leaving it there]". In no way does that support saying "I have £10k [surplus income] for gifts". Otherwise, why not say "I have £10k surplus income for gifts before I pull the money out of my SIPP, and then another £8k after I pull it out, totalling £18k"?

I'm not sure why you're talking about "pulling money out of the SIPP". That is not happening in this scenario. This is someone working (as shown by being allowed to contribute £8k to a SIPP, which implies a salary of £10k or more). I've not mentioned actually drawing money from a SIPP, and, to be explicit, am not interested in that. Take the income as coming from a combination of salary, rent, interest and/or dividends, and not from a pension.

The question is whether a pattern of payments into a SIPP count as part of the "standard of living":

Although the normal expenditure gifts must have left the transferor with ‘sufficient income’ to maintain their usual standard of living, they do not need to have actually used this for living expenses. The transferor may in fact choose to use capital to meet their living expenses and use the income remaining, after making the gifts, for some other purpose. It is enough, for the exemption to apply, that the income was enough to meet both the normal expenditure gifts and the usual living expenses.

IHTM14255 - Lifetime transfers: conditions for normal out of income exemption: transferor's standard of living - HMRC internal manual - GOV.UK

masonic

EthicsGradient said:

masonic said:

poseidon1 said:

masonic said:

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.

In keeping with HMRC's arbitrary rules concerning the intricacies of this relief, in terms of Sipp outflows UFPLSs as well the usual taxable income element are all counted as 'income' in looking at a deceased's surplus income calculation ( regular Tax free cash therefore transformed into income).

Reliance is placed on specific clarification obtained by  abdrn direct from HMRC when queried on this point - see my post on 3 November in the thread below - 

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

The thread was a spin off from a number of threads in the pensions forum discussing the impact of proposed future IHT on pension pots in 2027.

For those who were wealthy enough and had originally planned to leave their pension pots  (untouched) to children IHT free, the current ability to flexi access the pot and give away those monies IHT free predeath ( via regular UFPLSs) may now seem more appealing.

Good point. So there is no ambiguity if you can access it, and do, providing it is surplus to your needs in the relevant tax year. So it would seem to make sense that just as the income is deferred for tax purposes, so would your ability to gift it. Subject of course to paying tax on it at your marginal rate when it is taken out as income and gifted.

Coming back to the scenario of "Income after tax and NI £30k; general expenditure £20k; contribution to SIPP £8k [leaving it there]". In no way does that support saying "I have £10k [surplus income] for gifts". Otherwise, why not say "I have £10k surplus income for gifts before I pull the money out of my SIPP, and then another £8k after I pull it out, totalling £18k"?

I'm not sure why you're talking about "pulling money out of the SIPP". That is not happening in this scenario. This is someone working (as shown by being allowed to contribute £8k to a SIPP, which implies a salary of £10k or more). I've not mentioned actually drawing money from a SIPP, and, to be explicit, am not interested in that. Take the income as coming from a combination of salary, rent, interest and/or dividends, and not from a pension.

The question is whether a pattern of payments into a SIPP count as part of the "standard of living":

Although the normal expenditure gifts must have left the transferor with ‘sufficient income’ to maintain their usual standard of living, they do not need to have actually used this for living expenses. The transferor may in fact choose to use capital to meet their living expenses and use the income remaining, after making the gifts, for some other purpose. It is enough, for the exemption to apply, that the income was enough to meet both the normal expenditure gifts and the usual living expenses.

IHTM14255 - Lifetime transfers: conditions for normal out of income exemption: transferor's standard of living - HMRC internal manual - GOV.UK

I was using that example to illustrate the inherent double counting of income if you try to have your cake and eat it too. Someone who is in their late fifties would be in the position where they could do this and it clearly be against the rules if they did. Not because they are not allowed to pull £8k from their SIPP as surplus income and give it away, but because when they paid the income into their SIPP, it was no longer counted towards their income for the year. They could choose to take income from their SIPP and give that away, or they could give away the money instead of making a SIPP contribution, but they cannot both give away the surplus income and use it to fund a SIPP contribution that they subsequently withdraw as more income, either immediately or in future years.

To match gifts made using this exemption to income, any income must be available to the donor to be given away (whether or not those particular fungible pounds are actually used), and they cannot give away surplus income they are due to be paid in future years but have not yet received. If the donor defers the income by paying it into a pension, they don't have it until the future when they withdraw it, so cannot use it to support gifting until that future year. If they have "Income after tax and NI £30k; general expenditure £20k; contribution to SIPP £8k [leaving it there]", then the SIPP contribution adjusts their net income to £22k, £20k of which is needed to meet their usual standard of living, leaving £2k available for gifting.

Just like you are not interested in actually drawing money from a SIPP, I would suggest HMRC is not interested in pension contributions when considering your net income.

EthicsGradient

Well, I've found an HMRC page about "reduced net income" (but not specifically about the normal expenditure and gift rules), which does say that payments into a personal pension do not reduce net income:

How a pension contribution is paid can affect the amount of an individual’s ‘reduced net income’. If they pay their contributions using relief at source (RAS) it will not have been taken off their taxable income at the point of payment. Someone who has paid a contribution using RAS will have a higher ‘reduced net income’ than someone who has paid their contribution by another method.
...

Example 1

Judy and Chris both have a salary of £140,000. Both pay £15,000 contributions to their pension schemes. However Judy belongs to her employer’s pension scheme, which uses the net pay arrangement. Chris belongs to a personal pension scheme that has to use RAS.

Because Judy makes her pension contribution using the net pay arrangement her ‘reduced net income’ is £125,000.

As Chris makes his contribution using relief at source his ‘reduced net income’ is £140,000.

PTM056120 - Annual allowance: tax charge: rate of tax charge: terms used - HMRC internal manual - GOV.UK

Linton

EthicsGradient said:

Well, I've found an HMRC page about "reduced net income" (but not specifically about the normal expenditure and gift rules), which does say that payments into a personal pension do not reduce net income:

How a pension contribution is paid can affect the amount of an individual’s ‘reduced net income’. If they pay their contributions using relief at source (RAS) it will not have been taken off their taxable income at the point of payment. Someone who has paid a contribution using RAS will have a higher ‘reduced net income’ than someone who has paid their contribution by another method.
...

Example 1

Judy and Chris both have a salary of £140,000. Both pay £15,000 contributions to their pension schemes. However Judy belongs to her employer’s pension scheme, which uses the net pay arrangement. Chris belongs to a personal pension scheme that has to use RAS.

Because Judy makes her pension contribution using the net pay arrangement her ‘reduced net income’ is £125,000.

As Chris makes his contribution using relief at source his ‘reduced net income’ is £140,000.

PTM056120 - Annual allowance: tax charge: rate of tax charge: terms used - HMRC internal manual - GOV.UK

I dont think this has any relevence to gifts from income.  The definition of income can be different for different purposes.

Gifts from Income is really straightforward if you start from the premise that the objective of the rules is to prevent the use of "deathbed" gifts to extract capital that would otherwise be subject to IHT. If that is what you are trying to do then it is against the rules.  Just keep your affairs simple and dont try to play the system. If you can maintain your customary expenditure purely from standard ongoing income then any excess income can be gifted.

You will only get precise clarification if a case ever came to court which it is unlikely to happen since the costs in almost all cases would not be justified.

EthicsGradient

Linton said:

EthicsGradient said:

Well, I've found an HMRC page about "reduced net income" (but not specifically about the normal expenditure and gift rules), which does say that payments into a personal pension do not reduce net income:

How a pension contribution is paid can affect the amount of an individual’s ‘reduced net income’. If they pay their contributions using relief at source (RAS) it will not have been taken off their taxable income at the point of payment. Someone who has paid a contribution using RAS will have a higher ‘reduced net income’ than someone who has paid their contribution by another method.
...

Example 1

Judy and Chris both have a salary of £140,000. Both pay £15,000 contributions to their pension schemes. However Judy belongs to her employer’s pension scheme, which uses the net pay arrangement. Chris belongs to a personal pension scheme that has to use RAS.

Because Judy makes her pension contribution using the net pay arrangement her ‘reduced net income’ is £125,000.

As Chris makes his contribution using relief at source his ‘reduced net income’ is £140,000.

PTM056120 - Annual allowance: tax charge: rate of tax charge: terms used - HMRC internal manual - GOV.UK

I dont think this has any relevence to gifts from income.  The definition of income can be different for different purposes.

Gifts from Income is really straightforward if you start from the premise that the objective of the rules is to prevent the use of "deathbed" gifts to extract capital that would otherwise be subject to IHT. If that is what you are trying to do then it is against the rules.  Just keep your affairs simple and dont try to play the system. If you can maintain your customary expenditure purely from standard ongoing income then any excess income can be gifted.

You will only get precise clarification if a case ever came to court which it is unlikely to happen since the costs in almost all cases would not be justified.

I think " if you start from the premise that the objective of the rules is to prevent the use of "deathbed" gifts to extract capital that would otherwise be subject to IHT" is assuming far too much. Government may set up laws and rules with something in mind, but that doesn't mean that they then say "well, this wasn't what we primarily were worried about, so we won't enforce the law in your case". "Your customary expenditure" is the loaded phrase - is contributing to a personal pension "expenditure" or "saving/investment"?

As people say "make a will, even though you have plenty of life expectancy, you don't know what will happen", it also seems a good idea to know whether gifts made when you think you still have decades to live would become part of your inheritance if you died suddenly - and if a bit of paperwork now (making it clear they come from income you can afford, and documenting your expenditure) would prevent that.

saajan_12

This thread is getting into some tax nuances, none of which likely change the best course of action for the OP. Key questions:
* Whats your total estate size likely to be? 
* How much do you want to gift? 
* If you didn't gift the money now, what would you do with it? eg spend it, give it to someone else or save it and daughter would inherit it later? 

The starting point is there's no gift tax, so you can give whatever you like. If you're below the inheritance tax threshold, then it makes no difference. If you survive another 7 years, it makes no difference.
If the alternative is daughter would inherit the money after you pass, then inheritance tax would be payable at that point anyway.. so by gifting the money now, this tax payment becomes a possibility instead of a certainty. You and her are no worse off. 

masonic

EthicsGradient said:

Linton said:

EthicsGradient said:

Well, I've found an HMRC page about "reduced net income" (but not specifically about the normal expenditure and gift rules), which does say that payments into a personal pension do not reduce net income:

How a pension contribution is paid can affect the amount of an individual’s ‘reduced net income’. If they pay their contributions using relief at source (RAS) it will not have been taken off their taxable income at the point of payment. Someone who has paid a contribution using RAS will have a higher ‘reduced net income’ than someone who has paid their contribution by another method.
...

Example 1

Judy and Chris both have a salary of £140,000. Both pay £15,000 contributions to their pension schemes. However Judy belongs to her employer’s pension scheme, which uses the net pay arrangement. Chris belongs to a personal pension scheme that has to use RAS.

Because Judy makes her pension contribution using the net pay arrangement her ‘reduced net income’ is £125,000.

As Chris makes his contribution using relief at source his ‘reduced net income’ is £140,000.

PTM056120 - Annual allowance: tax charge: rate of tax charge: terms used - HMRC internal manual - GOV.UK

I dont think this has any relevence to gifts from income.  The definition of income can be different for different purposes.

Gifts from Income is really straightforward if you start from the premise that the objective of the rules is to prevent the use of "deathbed" gifts to extract capital that would otherwise be subject to IHT. If that is what you are trying to do then it is against the rules.  Just keep your affairs simple and dont try to play the system. If you can maintain your customary expenditure purely from standard ongoing income then any excess income can be gifted.

You will only get precise clarification if a case ever came to court which it is unlikely to happen since the costs in almost all cases would not be justified.

I think " if you start from the premise that the objective of the rules is to prevent the use of "deathbed" gifts to extract capital that would otherwise be subject to IHT" is assuming far too much. Government may set up laws and rules with something in mind, but that doesn't mean that they then say "well, this wasn't what we primarily were worried about, so we won't enforce the law in your case". "Your customary expenditure" is the loaded phrase - is contributing to a personal pension "expenditure" or "saving/investment"?

As people say "make a will, even though you have plenty of life expectancy, you don't know what will happen", it also seems a good idea to know whether gifts made when you think you still have decades to live would become part of your inheritance if you died suddenly - and if a bit of paperwork now (making it clear they come from income you can afford, and documenting your expenditure) would prevent that.

Ultimately what one would need to know is how would (or might) HMRC interpret it when the executor puts in the claim. There probably is no way of knowing this definitively, so you either rely on the advice of a solicitor with relevant experience, or take the risk and hope for the best. But the preparation part is the same either way, all you can do is provide a clear picture of your total earnings and expenditure.