Gifting out of excess income re dc pension

poseidon1 · 25 February at 9:15AM

https://forums.moneysavingexpert.com/discussion/comment/81898198#Comment_81898198

That assuredly is not HMRC's view with regard to drawdown from DC pensions.

Regardless of how it is generated ( sale of growth stocks, natural yield from divs/ interests etc), as long as it emerges as taxable income in the hands of the pensioner then a DC pension is just as much income for the purposes of the exemption as a DB pension, HMRC makes no distinction , see below -

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

The only questionable aspect of DC pension drawdowns for the purposes of the exemption are UFPLSs and the 25% tax free element receivable.

From the research I conducted a while back, we are solely reliant on Aberdeen's informal agreement with HMRC that the TFC element as well as the taxable, collectively constitue income for the purposes of the exemption.

DT2001 · 25 February at 1:16PM

https://forums.moneysavingexpert.com/discussion/comment/81898304#Comment_81898304

If HMRC’s view is subjective (which I agree is the case) would any advice from an accountant be subject to disclaimers?

Personally I think if your level of drawings from a DC pot are reasonable (say using the 4% ‘rule’) it is unlikely to be challenged especially as at least part of the withdrawal would be OK. If you are drawing more (as I intend to to utilise my BR tax band) I don’t think I could claim it as income despite paying income tax partly because it would not be a long term regular amount. The changes to the IHT rules have meant I have firmed up my ideas to gift capital sooner rather than try to control it through income’ gifting or trusts.

2hc9kmju · 25 February at 3:11PM

https://forums.moneysavingexpert.com/discussion/comment/81898818#Comment_81898818

Actually, yes, an accountant or similar professional advisor would have dealt with similar previous cases, would be able to research tribunal and court decisions to identify those with similar facts, etc., depending on exactly what their practice does, they may also have access to research and other tools that allows them to make a more informed decision than the OP or HMRC as HMRC are just likely to quote their manuals - even though they may be outdated due to recent decisions.

And obviously, everyone's circumstances are nuanced and one person's experience or plan may not be suitable to another's financial circumstances.

As a Chartered Accountant, I have seen many occasions where a taxpayer has made a decision which has resulted in a significant tax bill, which, if they had done things differently, there would have been no tax bill, or it would have been a lot less.

Gifting as capital is one option, but the seven-year rule applies, and unless you have a crystal ball that gives you the date or your demise is a risk that more tax would be payable than under a properly constructed gifting out of income approach would…

incus432 · 25 February at 3:41PM

https://forums.moneysavingexpert.com/discussion/comment/81897935#Comment_81897935

My understanding - as with most of the replies here - is that drawdown from a SIPP is definitely counted as income. Seems to be a lot of obfuscation around

ader42 · 25 February at 4:32PM

https://forums.moneysavingexpert.com/discussion/comment/81899074#Comment_81899074

The advice I have been given stated this too. HMRC of course consider ”taxable income” from pensions to be a subset of ”income”. i.e. income can be either taxable or not taxable but either way it is still income.

The IHTM14250 regulation states that for the purposes of IHTM14250 income is defined in accordance with normal accountancy rules, that income is not necessarily the same as income for income tax purposes (as some income could be non-taxable income); and that income for the purposes of IHTM14250 is the net income after payment of income tax.

”income is the net income after payment of income tax”

Withdrawal and subsequent gifting of a large lump would be classified as income but would fail the test of regularity so would not fulfil the conditions for IHTM14250. When it comes to regularity, it’s sensible if the gifts are more frequent, as monthly gifts prove regularity far sooner than annual gifts.

I was advised that I could quite legitimately gift £2k a month to a person each month out of my drawdown income, as long as it was regular (the plan is long-term), to the same individual, clearly out of excess income (my standard of living did not depreciate), and that it was well documented.

Long before this recent “pension inside the estate and IHT issue“ arose, I knew of elderly people who simply gave their entire state pension away every month to their offspring as it was surplus income that they did not need - all under this very same gifting from excess income regulation. So this approach (gifting out of excess income as part of an IHT mitigation strategy) is nothing new. The regulations have been there decades.

horace972897 · 25 February at 6:05PM

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

And this form from HMRC may help

https://www.gov.uk/government/publications/inheritance-tax-gifts-and-other-transfers-of-value-iht403

The article suggests keeping records in line with the form (gift records are described on the last page of the form)

TLDR: HMRC lists these in the income side of the form:

Salary
Pensions
Interest (including PEPs and ISAs)
Investments
Rents
Annuities (income element)
Other

TBH Not sure what you put against the investments line (is it dividends or does it include gain made etc)]

But deffo implies pension income can be used for this.

Crudecheese · 25 February at 6:08PM

https://forums.moneysavingexpert.com/discussion/comment/81897972#Comment_81897972

yes it is in hit territory hence asking people’s opinions and no not married to partner……

Yes I a, aware marriage would alleviate the problem but I feel being MADE to do something I currently do not wish to do is not correct.

poseidon1 · 25 February at 8:36PM

https://forums.moneysavingexpert.com/discussion/comment/81899318#Comment_81899318

A very curious way of looking at it.

If you are in a committed relationship, HMRC by dint of parliamentary edict, rewards those who marry or enter a civil partnership with a whole host of tax benefits and fiscal advantages completely denied to singletons like myself.

Odd that you would deny your committed partner ( and vice versa), the benefit of wholly tax exempt transfers of assets and pensions between you, over an objection to the institution of marriage/ civil partnerships.