Inheritance Tax

Notepad_Phil

https://forums.moneysavingexpert.com/discussion/comment/82060900#Comment_82060900

My understanding is that taking money out of an ISA is counted as income if that money came recently from interest or dividend payments within that ISA. It obviously doesn't if e.g. you just sell down one of your S&S ISA funds and take that money out or remove 1/2 of your cash ISA.

So provided you have enough money to generate a real £5k per year from within a cash or S&S ISA , then yes you can count is as income, so make sure you keep high yielding funds in your ISA and that they are Inc rather than Acc so that the dividends are paid in cash.

Bostonerimus1

https://forums.moneysavingexpert.com/discussion/comment/82060900#Comment_82060900

I think the point is that you have to keep careful records and understand how HMRC defines income. As Notepad_Phil points out ISA interest and dividensd are income, but the principal is not. So if you want to gift ISA principal to someone you should do it under the 7 year rules and document the heck out of it for your executors.

mrklaw

I just find it confusing how money I earned from a salary, invested in the same funds, gets different treatment depending what box it’s in

Notepad_Phil

https://forums.moneysavingexpert.com/discussion/comment/82061261#Comment_82061261

An ISA gets the same treatment as if you held the funds in a non-tax advantageous manner, i.e. in a general investment account, so it's really just when the funds are held in a pension that you can simply regularly drawdown an amount from that account and get to count it as income regardless of how that amount of money actually came about in that pension.

So pension drawdown is easy, everything else needs to generally either be interest or dividends that get paid out and you can then count that as income provided you gift it away quickly enough before it gets considered as forming new capital.

Bostonerimus1

https://forums.moneysavingexpert.com/discussion/comment/82061261#Comment_82061261

The "boxes" are constructed differently and are for different purposes. A DC pension contains tax deferred income and the rules treat any gains within the fund also as income…that's been set up by legislation. The ISA contains money that you've already paid income tax on and so it becomes principal, interest, dividends and capital gains when invested. Legislation allows all those categories to be tax free, but it does not change how the money is identified for accounting purposes.

poseidon1

As I indicated in my last post, definitions and terminology related to this exemption are not set out in a manner designed to be easily understood by the untutored layperson and HMRC does make certain assumptions

.

Good example is what is meant by the term 'income'.

HMRC's starting point is it should be determined each( tax) year in accordance with 'normal accountancy rules/principles' - see link below

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

So exactly what are those rules?

Already, the average layman is at a disadvantage compared to an accountancy trained tax practitioner for whom the distinction between capital and income will be 2nd nature. However for anyone else, HMRC chooses not to elaborate on what those underlying rules are.

Some forumites perhaps via their occupations or instinctively, can understand or divine what the accountancy principles are and apply this ( for example) to income accruing within an ISA and therefore identify this as solely applying to dividends and interest paid out to them periodically during the tax year.

However, clearly from some of queries raised here this is not universally understood, and this is no doubt down to not knowing ( or perhaps unable to guess) what 'normal accountancy rules' mean.

Accordingly, they may struggle to understand why dividends reinvested in purchasing more shares or income identified as accumulated in an accumulation unit trust ( in an ISA or GIA), is not also capable of becoming distributable income, by the simple expedient of selling shares or units equivalent to that income. Unfortunately what they will not know is that under normal accountancy principles they have capitalised that income.

Just one small example to illustrate this exemption cannot be approached on a simple 'common sense' basis. It requires very specific knowledge.

Bostonerimus1

https://forums.moneysavingexpert.com/discussion/comment/82061492#Comment_82061492

Well made points. Generally accepted accounting principles are definitely not immediately intuitive. There will be some people who have dealt with work budgets that require a distinction between things like daily expenses and capital expenses who will have some comfort level with the HMRC rubric, but even then it takes some thought.

DT2001

If you depleted your SIPP over say 10/15 years, all your withdrawals would be treated as income (as you had paid tax on them) despite the fact that you were potentially reducing your capital (assuming you spent/gifted all of your income). You have established a regular pattern of income to comply with that requirement.
I think it is simple to play by the rules (natural income from ISA paid out monthly/quarterly) and drawdowns from SIPP without becoming bogged down.
Make sure you have enough for retirement, then either gift using 7 year rule or if you want to retain the capital (say for care costs) put it income generating funds and pay it out.

Dead_keen

Income is not defined in the IHTA84 but should be determined for each year in accordance with normal accountancy rules. 

I struggle with this. In fact, I'd say HMRC is wrong to say that.

I am in individual who has no trade. What GAAP do I use? Big companies GAAP? Little companies GAAP? UK GAAP? Or because I've been on holiday a lot, international GAAP?

Let's assume I use some common-or-garden UK GAAP. One of the bits says (no emphasis added):

income (which includes both revenue and gains)

So if I am looking at UK GAAP to see what income means, it includes gains. That is not what the legislation or or HMRC means.

Perhaps that's a typo in the accounting standard. Let's check how the glossary defines income (no emphasis added):

Increases in assets or decreases in liabilities that result in increases in equity, other than those relating to contributions from equity investors.

So when can I recognise the increase in value of an asset? Is it on sale or am I allowed to, or required to, use fair value accounting for the shares I own? If so, and the share price has gone up, that's income for accounting purposes. That's not how I read IHTA.

What about a three year fixed rate savings account where I get interest at the end of three years? UK GAAP says (no emphasis added):

An entity shall prepare its financial statements … using the accrual basis of accounting. On the accrual basis, items are recognised as assets, liabilities, equity, income or expenses when they satisfy the definitions and recognition criteria for those items.

So I accrued the interest annually. Great. But that's not what the legislation says. And I doubt if it is HMRC's practice.

You could say that I shouldn't use the accruals method, but the only way to know how much income I have (based on normal accountancy rules) is to use the accruals method (or a mark-to-market method where I use a fair value method). From a normal accounting perspective, you can't determine what is income without knowing how it is measured.

What if I get attendance allowance? For accounting, that's a government grant. Easy, recognise as income when paid? But what if I use it to buy a wheel chair? Do I now recognise the income over the useful life of the wheel chair? If I believe HMRC's comments about normal accountany rules then I do. But I don't believe them.

michaels

Oh yes, and there is inflation. During a period of high inflation and interest rates you are effectively withdrawing capital if you treat all the interest as income...…