Inheritance Tax

michaels

What I found suggested it needed to be 'interest or dividends' and 'paid away' and that ISA providers understood this requirement and had mechanisms in place to support this. You can then also choose funds that target income rather than capital preservation (for example by investing in high yielding low grade bonds and by taking all fees form the capital portion rather than from the income) although of course these might not satisfy your normal risk tolerance.

Dead_keen

Are you suggesting that the gifts from excess income CAN include regular ISA withdrawals?

No idea what someone else is suggesting, but ISA withdrawals are not income. Similarly, moving money from your first direct current account to your HSBC current account is not income, and neither is withdrawing cash from your HSBC account and putting it in your pocket.

I just draw an amount pcm from mine….it has continued to grow to date, but is still invested, so the regular income is not 'just' dividend or interest.

The interest and / or dividends received on the assets held in the ISA is income. Realised and unrealised growth in the value of the assets is not income. Whether income is "regular" or not does not matter for this IHT exemption.

You don't have to identify the £10 of interest you receive in the ISA for a month, draw that particular £10 out and then gift that ten pound note. You can just pay the £10 from your current account.

poseidon1

The isa income distribution example is a simple one.

If like myself you have investments in your ISA yielding monthly/quarterly/annual dividends and interest which is automatically paid out into your nominated current account as it arises ( ie not left to accumulate within the ISA), this is income for the purposes of the exemption. The key point is it must be distributed to you for you to go on and spend or gift it, otherwise risking the 2 year accumulated income converting to capital.

In this regard my ISA comprises dividend paying shares/unit trusts/ investment trusts as well as interest bearing government gilts/corporate bonds/bond funds.

Its not rocket science but perhaps difficult to comprehend by those who have never invested in instruments that produce a natural income flow, and restricted their investing to accumulating tracker funds or etfs where income of this nature is not evident.

DT2001

https://forums.moneysavingexpert.com/discussion/comment/82051160#Comment_82051160

Just restating Aberdeen’s explanation.

It is broadly income received after tax from employment or pension, the natural yield from investments such as interest or dividends and rental income. It also includes the natural income from ISAs if the taxpayer actually receives the distribution rather than accumulating it within their ISA.

It must be natural yield. MIL is with Fidelity and they gather the income for the month and then pay it out. It can vary quite a bit as the funds/ETFs tend to pay quarterly but there are a couple that pay half yearly.

I have set up our investments to be mainly income focused ITs in our ISAs and growth ETFs in our SIPPs (to generate income, if needed for a building project, without OH using her taxable SIPP). It may not be optimum but it meets our goal. Can you tweak your holdings across SIPPs and ISAs or level of drawings.

mrklaw

I find it opaque and inflexible. Why does the vehicle matter? A S&S ISA can hold the same funds as a SIPP - why is one considered income and the other not? Or if I draw excess income from a SIPP and move to an ISA (eg to help stay in basic rate over a few years and build up a pot for larger purchases or gifts) - magically it stops being income?

its the one small thing I was hoping to do in retirement - draw to top of basic rate into S&S ISA to increase the accessibility of funds without breaching 40%. perhaps for one-off purchases, perhaps to help kids with a deposit etc - which would take me into 40% if done in a year’s drawdown.

hopefully ok just as a gift, but the way the status of that money changes makes no sense to me. it was income when it was salary, stays income going into my pension, is income when drawn down - and ceases to be income the second it lands in a savings account?

Dead_keen

I find it opaque and inflexible.

A lot of people do. But it is a generous relief.

Why does the vehicle matter? A S&S ISA can hold the same funds as a SIPP - why is one considered income and the other not?

You beneficially own the stuff in an ISA. Money in your ISA account is your money, like money in your bank account. So the interest / dividends received on your assets is income (for this IHT exemption).

Take money out of an ISA - not income (**). You are just shuffling money from one pocket to another.

(**) assuming the money you put in there has been in there for a good while. If you get some October salary, put it in an ISA for a couple of months because you plan to give it to the kids as a Christmas present. What does a while mean? See the last bit.

A SIPP might be set up as a trust of which you are a beneficiary. The assets of the SIPP are the trustee's assets, not yours - yet. Interest / dividends of the SIPP are the trustee's, not yours. So ignored for this IHT exemption.

The money that is paid to you from the SIPP may or not be income, depending on what pattern is. Take everything out in one go, unlikely to be income (for the purposes of this IHT exemption - income tax is different). Take a regular amount out each month, definitely income.

the way the status of that money changes makes no sense to me. it was income when it was salary, stays income going into my pension, is income when drawn down - and ceases to be income the second it lands in a savings account?

Nope. But at some stage the £100 of salary you put into an ISA will change from £100 of income to £100 of capital. When? No idea. But HMRC think after about a couple of years unless the facts suggest different. I have my own views on the facts I am playing with, but these are just my own views.

NormalNorman

https://forums.moneysavingexpert.com/discussion/comment/82052582#Comment_82052582

I hear you. Been having exactly the same thoughts. The more I research the more confusion sets in. Seems to me the tax take you will pay has been decided the moment you retire and god help you if you deviate.

So, like with other aspects of life you just find a way to navigate the system to your advantage. Be it keep a basic record in your usual finances spreadsheet, gift to kids well before you’re likely to cork it, spend to enjoy the gogo years, use all your tax allowances, keep outgoings to a minimum, straightforward finances, use joint accounts where possible reducing the number of items that fall under probate/letter of confirmation, not just a will/poa but write down your funeral wishes even having plans in place etc.

DT2001

It’s a bonus and I think relatively simple if you keep good records.

As normalnorman says just work on how you can use it to your advantage. Have your income generators in your ISA and growth funds in your SIPPs. For MIL we are using a mix of funds and ITs. Some of the latter are highly payers with a possibility of capital loss.

Make sure your retirement requirements are met and then use whatever is available to avoid your beneficiaries paying any more than they need to.

AlanP_2

https://forums.moneysavingexpert.com/discussion/comment/82052643#Comment_82052643

I mentioned running things through a joint account and claiming IHT relief for gifts from excess income earlier and the suggestion was made that separate accounts may be best as INCOME, EXPENDITURE and THE GIFTS are related to an individual for this exemption as far as HMRC are concerned. That TBF is the same as for taxation in general so not unreasonable.

I'm mulling over how to deal with the potential pitfalls that come to mind here over and above the Joint / Sole account question.

For example do we need to adjust expenditure for individual items? E.G. My Golf Club membership is my expenditure not my wife's and her Health Club membership is not mine.

If she pays for a holiday on her CC is that her expenditure even if we are both going on the holiday?

We opened a JSIPP and a JISA for our granddaughter. On the form the "donor" of the funds was put down as my wife as she happened to fill it in and write the initital deposit cheques and put her name down for the DDs from our joint account.. Does that mean the gifts to date are from her and will continue to be until we change the DD source account to a sole account of mine at some stage?

Lots of rabbit holes to get lost down once you peek inside this can of worms to mix a few metaphors.

DT2001

https://forums.moneysavingexpert.com/discussion/comment/82058781#Comment_82058781

Good questions. Do you have to split household bills 50/50 even if your retirement income is unequal? So probably best to make gifts from the sole account of the higher income generator.

If you have surplus income and ‘gift’ it to your OH does it change into capital for them or remain income.

Not insurmountable problems but worth starting on the right lines asap.