Gifts Out Of Income in Retirement

MarkJR · 22 February 2019 at 5:46PM

Does anyone know how HMRC judge what your 'income' is in retirement to with respect to 'Gifts made as part of normal expenditure out of income' ?
The only documentation I can find is in the table at the end of IHT403 listing the components of income.

Morally I consider my ISA and pension pot to equally be my retirement savings. However I doubt HMRC sees it that way.

If I follow the use your ISA first principle (for IHT planning), am I right to assume any ISA capital I use is depleting my capital in HMRC's eyes?
(So if I gift in this scenario these gifts would have to be potentially exempt transfers)

Secondly am I right to assume whatever I choose to drawdown from my pension pot as income is pension income with respect to gifting?
i.e. There are no drawdown limits in HMRC's eyes in relation to gifting out of income

I just want to know the rules so I can follow good practice and leave a clear paper trail and notes should it be needed.

xylophone · 22 February 2019 at 6:12PM

https://www.pruadviser.co.uk/knowledge-literature/knowledge-library/normal-expenditure-out-of-income-exemption/

Keep_pedalling · 22 February 2019 at 6:13PM

Gifting from income is from excess income so if you are dipping into your ISA savings then you don’t have any excess income to give, so yes a thing over your £3000 annual allowance would be classed as PET.

If your estate is in IHT territory you you would be better off gifting one off larger sums than in dries and drabs.

Skibunny40 · 23 February 2019 at 10:08AM

I know it won't happen, but HMRC really need to update how it classifies gifts out of income. The current definition makes sense for retirees on DB pensions who get paid a set amount each year, which can clearly be defined as income. However, for those of us heading for retirement with a mix of drawdown DC pensions, ISA's etc, our only "set" income will be the state pension? I can't see anyone managing to give gifts out of that!

Linton · 23 February 2019 at 10:57AM

From a tax and legal point of view your pension is a different person to you. So an ISA which is owned by you is very different to a pension pot which isnt. It seems to me pretty self-evident that drawing down from a pension pot creates an "income" and in the absence of HMRC guidance to the contrary this is how you should play it.

There are no complete and definitive rules of what comprises gifts out of income, just some general principles. Arguable difficult cases would need to be resolved by the courts, presumably at great expense to all concerned. It would therefore seem prudent to keep well within the guidelines. An important principle is that gifts out of income should be part of a your standard behaviour. So the use of a large one-off drawdown to justify a large one-off gift could be problematic.

Keep_pedalling · 23 February 2019 at 12:05PM

Linton wrote: »

From a tax and legal point of view your pension is a different person to you. So an ISA which is owned by you is very different to a pension pot which isnt. It seems to me pretty self-evident that drawing down from a pension pot creates an "income" and in the absence of HMRC guidance to the contrary this is how you should play it.

There are no complete and definitive rules of what comprises gifts out of income, just some general principles. Arguable difficult cases would need to be resolved by the courts, presumably at great expense to all concerned. It would therefore seem prudent to keep well within the guidelines. An important principle is that gifts out of income should be part of a your standard behaviour. So the use of a large one-off drawdown to justify a large one-off gift could be problematic.

I suppose in reality, you would need a pot of sufficient size to draw income in excess of £3000 over your actual expenditure without risking running out during your lifetime before you could even looking at doing this.

Gifts Out Of Income in Retirement

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