Gifting from SIPP

harlequin55

I am in the fortunate position of having two SIPPS from which I have no need to take income.  An existing works and state pension are sufficient to enjoy a comfortable retirement. With the proposed IHT charge on unused pensions I am considering options to mitigate this. One which I am considering is to commence drawing an income from one SIPP, albeit that it will be taxed at 40% due to its addition to existing income, and use this money to gift to family. Can this be classified as gifting out of income with appropriate records kept, or would HMRC not challenge this?

Keep_pedalling

It would, but there is no tax advantage to doing this and the rules may have changed by the time you die. Are you married? 

harlequin55

My understanding is that on second death and after the age of 75 IHT would be levied at 40% and recipients of pension would be taxed on withdrawals at their marginal rate. If it were given away now as gifts out of income then recipients would not pay Tax. If they were then to use it to fund a pension then they would be able to claim tax relief. Yes I am married.

poseidon1

harlequin55 said:

My understanding is that on second death and after the age of 75 IHT would be levied at 40% and recipients of pension would be taxed on withdrawals at their marginal rate. If it were given away now as gifts out of income then recipients would not pay Tax. If they were then to use it to fund a pension then they would be able to claim tax relief. Yes I am married.

Evidently, you have thought this through and certainly subject to maintaining the necessary records (see page 8 IHT 403 form), see no reason why your executors should not be able to substantiate a successful claim on death.

However, just one small point you say DB and state pensions enough to sustain comfortably lifestyle for you and wife. Does that remain the case if you predecease your wife, and her DB widow's pension is a fraction of your own? The Sipps could be a useful fallback to help fill the deficit.

However, I do note from a previous post  your wife has  recently inherited a property so her own personal resources have increased somewhat.

poseidon1

OP in case this might apply to you ( or others), if you have not yet taken your TFC from either sipp, and utilise UFPLSSs to access regular TFC with your taxable pension then ( some what surprisingly) the regular 25% TFC element is also considered income for the purposes of the gifts out of surplus income exemption- see link below

https://techzone.aberdeenadviser.com/public/iht-est-plan/gifts-out-of-surplus-income

So when documenting these gifts, care needs to be taken not to solely rely on the sipp provider's P60 pension payment summary which will likely only record the taxable element of the annual UFPLSS withdrawals.

Keep_pedalling

When the IHT changes come into effect is unlikely that IHT would apply to your SIPP if you are the first to go as it will likely to be covered by spousal exemption, so paying 40% tax on withdrawing now it seems pointless. If your joint assets currently exceed £1M them making larger gifts from savings would seem a better bet.

Albermarle

harlequin55 said:

My understanding is that on second death and after the age of 75 IHT would be levied at 40% and recipients of pension would be taxed on withdrawals at their marginal rate. If it were given away now as gifts out of income then recipients would not pay Tax. If they were then to use it to fund a pension then they would be able to claim tax relief. Yes I am married.

To be clear, on second death , unused DC pension pots ( including SIPPs) would be added to your other assets to calculate your IHT liability.
Any IHT payable will be apportioned between non pension assets and pensions.
So only a portion of your unused pension pots would be subject to 40% IHT.
If you were only just above the IHT limits, then the tax on the unused pots would be small.
If you were a multi millionaire, the most of the unused pots would get taxed.

fuzzzzy

I must admit I am a bit unsure what to do with my work DC pot now, as before the IHT rules change I had always intended to leave it until last. I don't see any point doing anything with it before 2027 though just in case I peg it in the meantime.

ukdw

harlequin55 said:

My understanding is that on second death and after the age of 75 IHT would be levied at 40% and recipients of pension would be taxed on withdrawals at their marginal rate. If it were given away now as gifts out of income then recipients would not pay Tax. If they were then to use it to fund a pension then they would be able to claim tax relief. Yes I am married.

Sounds like a pretty good strategy to me - especially if the recipients are in the 40% tax relief band.

Triumph13

ukdw said:

harlequin55 said:

My understanding is that on second death and after the age of 75 IHT would be levied at 40% and recipients of pension would be taxed on withdrawals at their marginal rate. If it were given away now as gifts out of income then recipients would not pay Tax. If they were then to use it to fund a pension then they would be able to claim tax relief. Yes I am married.

Sounds like a pretty good strategy to me - especially if the recipients are in the 40% tax relief band.

If the recipients are themselves in the 40% band, then you are actually better off withdrawing it yourself at 40% tax, even if you stick in in an ISA rather than gifting it, simply because you get better value from your nil rate band that way.

Side thought - say you had two kids, one a 20% payer and one a 40%, and your will just left a 50:50 split.  I wonder what the position of the executor would be in terms of preferentially routing pension assets to the 20% payer vs unwrapped assets to the 40% one?  I would hope my kids would sort it out via deed of variation, but some people might find it worth including something in their will - in particular setting out how any difference in the pension split should be valued ie do you use the tax rate of the higher payer, so they still get their 50% and the lower paid gets all the benefit of the tax efficient split, or do you do the sums to split the benefit equally?  One to ponder.

Albermarle

say you had two kids, one a 20% payer and one a 40%, and your will just left a 50:50 split.  I wonder what the position of the executor would be in terms of preferentially routing pension assets to the 20% payer vs unwrapped assets to the 40% one?

The pension pots would be paid out to the beneficiaries in line with what it said on the Expression of wishes form. ( unless there were exceptional circumstances) Pensions should not even be mentioned in wills, as they are held in trust.
This will remain the same even after 2027, when they will be included in IHT calculations, but otherwise will legally remain out of the Estate like now.