SIPPs and gifting

ClockBear

I wish to regularly gift money to my adult children funded by withdrawals from my SIPP using UFPLS. Can these withdrawals be counted as “gifts from surplus income” according to HMRC’s gifting and inheritance tax rules?

I had previously asked ChatGPT about this and it gave advice that only annuities counted as income from a SIPP, the rest (UFPLS and FAD) counted as withdrawals from capital. However, it seems to have changed its mind when I asked recently.

Can anybody clarify this for me?

Many thanks.

NoMore

Gifts out of surplus income - 15 points to consider

Read section 6 for your particular answer but would take the whole article in.

ClockBear

Thank you NoMore for your response.

Section 5 says “It is broadly income received after tax from employment or pension”

Section 10 seems to also relate, particularly with mention of capital:

“If they have to resort to capital to maintain their lifestyle this is an indication that the surplus is insufficient to cover the gift, and the exemption may be lost or limited.”

I am currently withdrawing £10k per year via UFPLS for the purpose of gifting to my adult children. I’ve been doing this for the past two years, the first year in one amount, the second year in two withdrawals. I plan to do this on an ongoing basis.

From your link I believe that I fulfil all necessary conditions.

Thank you.

Albermarle

https://forums.moneysavingexpert.com/discussion/comment/81973021#Comment_81973021

Section 6

Can pension tax-free cash be included in income?

Pension drawdown withdrawals, including any tax-free cash element, are also treated as income for this purpose. Of course, they will still need to satisfy the other conditions of the exemption to qualify. For example, stripping out all the tax-free cash and gifting it over a couple of tax years would typically fail to establish a regular pattern of gifting. The withdrawals would not look like income. However, spreading withdrawals over a longer period, similar to an annuity, is more likely to satisfy the exemption.

The last sentence has a critical phrase ' more likely to satisfy the exemption'

AIUI, your executor has to prove to HMRC that you have correctly made Gifts out of Income, and that HMRC have discretion whether to accept or not ( not just for pension income, but the whole idea).

To my mind the whole Gifts out on Income rule is pretty much a loophole that could be closed at some point, or the criteria tightened as to what was acceptable. For example it could have to be proven that drawdown income only came from dividends etc and not by reducing capital, if HMRC wanted to get awkward.

NoMore

To my mind the whole Gifts out on Income rule is pretty much a loophole that could be closed at some point, or the criteria tightened as to what was acceptable

I agree, it does seem that this was little known and not really used when Pensions were not subject to IHT, easier to just leave the pension as inheritance, with Pensions coming into the estate, this is going to be used more and come on to HMRC's radar.

I think at some point they will just put an overall limit on it.

ClockBear

Thank you for your input everyone. I think I’ll just have to work with the rules as they are currently.

DRS1

You could always try filling out the IHT Form 403 and leave it for your executors with your will. It is the last page for these gifts

digbydog

You could always try filling out the IHT Form 403 …

I strongly agree that this good advice especially if you are part of a couple where there will be a first death and a second death. I'm trying to do this at the moment and am finding it a challenge but it is a challege that would be better done by me rather than my executors.