HMRC Surplus Income gifting clarity - IHT

DeeKent

With the incoming IHT changes I'm planning my pension with the intention of surplus gifting from my pension income to reduce the estate.

The HMRC guidelines seem open to interpretation as it doesn't sound like its pure math - and a rejection would be devastating.

So I'd like some advice on what is best practice to avoid any issue.

I am looking to setup regular monthly gifting of a fixed amount to my children. This would be approx 18% of my months income. Is there a safe ratio to go with if I wanted to increase this further?

Is spend less to give more fine as long as you have stable surplus. And what is the practical meaning of 'without affecting your standard of living'

I understand it will be essential to track everything and stay consistent and gift quickly. How consistent is consistent? What if it's every month but the value is varied? Does it have to be monthly, quarterly or can it be annually also?

Over time what if your lifestyle needs to take a hit due to health and you stop for a while. Would it void the previous payments period?

If anyone has some experience in this domain please share…

Thank you

Keep_pedalling

How much other income are you receiving? How much do you have in your pension pot?

Reducing your expenditure so you can give more away does not help with IHT it just means your children get to spend more of your money at your expense, so I can’t see the point of doing that.

DRS1

There are an awful lot of threads on this subject. Whether you will get clarity from reading them I couldn't say. It is one of those subjects that gets murkier the more people discuss it.

On the 18% point - yes you could do more if you have more than 18% of your income surplus to requirements. But do you?

Have a look at the IHT form 403 page 8 and see if you can fill that in for every year you make these gifts. If you can't then maybe you should reconsider this idea.

silvercar

No one really has experience, until they have died and hmrc has ruled on the validity of the gifts.

We gift a relatively small amount monthly to my grandson, directly into his JISA. That clearly doesn’t effect our normal living expenses.

We also gift an annual sum to our children. I don’t see that would be a problem as it can be shown to be from surplus income (it is gifted at the point where there is clearly excess income in the accounts. It is regular (annual) and documented that it will be so.

Perhaps more contentiously we also gifted house deposits to our children. These were in separate years and coincided with OH big bonuses, so on a percentage of income they should qualify as gifts from surplus income. And tied to the previous annual gifts they form part of regular giving. (Plan A is to outlive these gifts by 7 years, plan B is to rely on this regular gifts out of income category).

Albermarle

The HMRC guidelines seem open to interpretation as it doesn't sound like its pure math - and a rejection would be devastating.

Not sure that having to pay some tax could be classed as a devastating life event, especially as you would be dead anyway. A lot worse things happen at sea as they say .

In fact many people see this as a loophole of kinds, same as with IHT exemption for unused pension pots, and we know what happened there…..

Keep_pedalling

It is an exemption that is no longer fit for purpose. It was relatively simple when virtually every one had DB pensions but not it is horribly complex and the rules are somewhat ambiguous.I would like to see it scrapped in return for a significant increase in the annual exemption.

Albermarle

https://forums.moneysavingexpert.com/discussion/comment/82059106#Comment_82059106

I'll second that !

kermchem

There are many threads on this topic.

My mother made monthly contribution to grandchildren's child trust funds / Junior ISAs. As executor I found myself potentially needing to justify these to HMRC (in the end estate crept under threshold by a few £K). I strongly recommend anyone making gifts to keep a copy of IHT403 up to date and accessible to your executors. Notes, spreadsheets, etc., are great, but HMRC will want IHT403 FIRST!

silvercar

There’s an article discussing this in today’s Sunday Times. Online too:

https://www.thetimes.com/money/tax/article/inheritance-tax-grab-pension-how-to-beat-bhntmx9wh

If the link doesn’t work, the relevant parts of the article are:

“The gifts must be part of your normal expenditure, they must be made from your income (so no liquidating investments or using savings) and making them cannot affect your own standard of living. 

Many savers are changing the way they take money from their pension to qualify for the relief. Any regular income taken from a pension, if consistent month by month, could allow for regular tax-free gifts. David Jane, a fund manager from the investment firm Premier Miton, said that rather than making large withdrawals, pensioners were switching their money into funds that pay an income. They were then using that regular income to pay into pensions for their children or grandchildren, also benefiting from pension tax relief. “

“You could also use a chunk of a pension pot to buy an annuity — an insurance product that pays out a guaranteed income for life in exchange for a lump sum. Once you have used that lump sum to buy an annuity, it falls out of the value of your estate for inheritance tax purposes, and you could make regular gifts from the annuity income.”

DeeKent

https://forums.moneysavingexpert.com/discussion/comment/82059241#Comment_82059241

The annuity idea is no different than just gifting from Drawdown. No IHT advantage there.

silvercar

https://forums.moneysavingexpert.com/discussion/comment/82059468#Comment_82059468

The suggestion is that drawdown is drawing on capital, so not within income, whereas an annuity converts capital to income.