IHT and gifts from income

RSD7a

Let's say my cash ISAs generate £10k interest this f/year and my Stocks and Shares ISAs increase in value by £20k. Can I treat all/any of this as income for IHT purposes?

bobster2

Discussed here (but behind a paywall)....

https://www.telegraph.co.uk/money/tax/beating-inheritance-tax-adviser-thinks-breaking-hmrc-rules/

The letter writer there is asking the same question because his/her financial advisor has said the ISA interest cannot count as income for this purpose.

The Telegraph financial writer disagrees - says the interest can count as income for gifting BUT that it doesn't retain the character of income indefinitely. Says...

There is no hard and fast rule but, subject to evidence to the contrary, you correctly note HMRC’s view that income usually becomes capital after two years.

Keep_pedalling

Dividends and interest is income, capital gains is not. 

RSD7a

Keep_pedalling said:

Dividends and interest is income, capital gains is not. 

So S&S ISAs that are designated Income would qualify, but not those designated Accumulation?

Keep_pedalling

RSD7a said:

Keep_pedalling said:

Dividends and interest is income, capital gains is not. 

So S&S ISAs that are designated Income would qualify, but not those designated Accumulation?

No, Acc funds still grow by a combination of dividends, interest and capital gains, so you still have income from them it just becomes more difficult to manage so you would be better switching to Inc funds for simplicity.

Linton

Keep_pedalling said:

RSD7a said:

Keep_pedalling said:

Dividends and interest is income, capital gains is not. 

So S&S ISAs that are designated Income would qualify, but not those designated Accumulation?

No, Acc funds still grow by a combination of dividends, interest and capital gains, so you still have income from them it just becomes more difficult to manage so you would be better switching to Inc funds for simplicity.

mmmm doesnt the dividend/interest income generated by Acc funds turn into capital the moment it is used to buy extra investments?  You can only access the income part by selling capital.  Income becomes capital after 2 years, this doesnt mean that purchased investments can remain as income for 2 years.

The situation with gifts from income is different to that for income tax/CGT.

Keep_pedalling

Linton said:

Keep_pedalling said:

RSD7a said:

Keep_pedalling said:

Dividends and interest is income, capital gains is not. 

So S&S ISAs that are designated Income would qualify, but not those designated Accumulation?

No, Acc funds still grow by a combination of dividends, interest and capital gains, so you still have income from them it just becomes more difficult to manage so you would be better switching to Inc funds for simplicity.

mmmm doesnt the dividend/interest income generated by Acc funds turn into capital the moment it is used to buy extra investments?  You can only access the income part by selling capital.  Income becomes capital after 2 years, this doesnt mean that purchased investments can remain as income for 2 years.

The situation with gifts from income is different to that for income tax/CGT.

When we had GIA accounts with ACC funds in it we always got annual reports from the Transact platform that contained a breakdown of interest and dividends and these figures went on our SA tax returns, so definitely  treated as income for tax purposes. 

Linton

Keep_pedalling said:

Linton said:

Keep_pedalling said:

RSD7a said:

Keep_pedalling said:

Dividends and interest is income, capital gains is not. 

So S&S ISAs that are designated Income would qualify, but not those designated Accumulation?

No, Acc funds still grow by a combination of dividends, interest and capital gains, so you still have income from them it just becomes more difficult to manage so you would be better switching to Inc funds for simplicity.

mmmm doesnt the dividend/interest income generated by Acc funds turn into capital the moment it is used to buy extra investments?  You can only access the income part by selling capital.  Income becomes capital after 2 years, this doesnt mean that purchased investments can remain as income for 2 years.

The situation with gifts from income is different to that for income tax/CGT.

When we had GIA accounts with ACC funds in it we always got annual reports from the Transact platform that contained a breakdown of interest and dividends and these figures went on our SA tax returns, so definitely  treated as income for tax purposes. 

Yes but as happens elsewhere income tax and inheritance tax have different rules. I thought the issue what was income for Gifts from Income - that is what the thread was about.. Your reply implied that Acc dividends could be income for this purpose whereas I am suggesting that they aren't. 

probate_slave

Indeed, the question of accumulation dividends really doesn't seem clear (to me) from the manual:

https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm14250

However in 2011 I raised it with HMRC, and an officer phoned back from Edinburgh. He insisted that accumulation dividends on Unit Trust holdings were allowed as income, as were annual interest payments on National Savings Certificates. 'NS & I' were very unwilling to give up the details, believing these were capital, but eventually gave me a breakdown for the previous 7 years.

dales1

Linton said:

Yes but as happens elsewhere income tax and inheritance tax have different rules. I thought the issue what was income for Gifts from Income - that is what the thread was about.. Your reply implied that Acc dividends could be income for this purpose whereas I am suggesting that they aren't. 

But elsewhere ...

Tom99 wrote: »

You have to demonstrate you have surplus income over expenditure, that's all. You don't have to show that you very specifically used an actual income source as the gift.
Typically you would not remove income from an ISA but that does not prevent you counting that income.

Personally, I would go further.

The HMRC IHT manual https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm14250 specifically instructs Customs staff:

“If a gift is made out of a current account you only need to check that the gift could have been made out of income. You do not need to match the gift to specific money in the account”.

The reason for this is explained in the manual https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm14255 where it tells Customs staff:

“Sufficient income

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.

If the income that is left after making the gifts is not enough to meet the usual living expenses, the exemption is not available in full, but part of the gifts may still qualify for the exemption”.