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ISA Income and Out of Income Gifting (IHT avoidance)

Practical Issues
edwills46
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ISA Income and Out of Income Gifting (IHT avoidance)

#456025

Postby edwills46 » November 6th, 2021, 10:30 am

I have come up with a cunning plan, but will it go the way of Baldrick's ideas?
I have established a record of giving gifts out of surplus income, including using income from my ISA to avoid IHT. I should like to give more and wonder if the following would work.
Suppose I 'buy' dividends in my ISA account; specifically: swapping out of some of my existing world index holdings, buying a corresponding amount pf a relatively high dividend-yielding stock (e.g. a FTSE 100 ETF) just before it goes ex-div, and then selling it shortly after. That would boost my ISA divi income, especially if I found a way of doing it several times a year. There'd be costs (dealing cost, spreads, reduction in the ETF value between buy and sell, loss of growth while holding FTSE100 instead of my usual world index) and risks (market movements during the activity).
Would/should HMRC accept the resulting dividends as income for gifts out of surplus income purposes (they would regard them as income if they were in a dealing account!)?
Ed

JohnB
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Re: ISA Income and Out of Income Gifting (IHT avoidance)

#456035

Postby JohnB » November 6th, 2021, 11:35 am

https://www.gov.uk/hmrc-internal-manual ... /ihtm14250 applies, but has the unhelpful

Income is not defined in the IHTA84 but should be determined for each year in accordance with normal accountancy rules. It is not necessarily the same as income for income tax purposes. Income is the net income after payment of income tax.


no mention is made of ISAs

https://www.taxationweb.co.uk/forum/gif ... 41149.html suggests ISA income is included, https://forums.moneysavingexpert.com/di ... isa-income has 30 posts, most thinking ISA income is counted, but they are not definitive of course.

Howard
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Re: ISA Income and Out of Income Gifting (IHT avoidance)

#456047

Postby Howard » November 6th, 2021, 12:36 pm

edwills46 wrote:I have come up with a cunning plan, but will it go the way of Baldrick's ideas?
I have established a record of giving gifts out of surplus income, including using income from my ISA to avoid IHT. I should like to give more and wonder if the following would work.
Suppose I 'buy' dividends in my ISA account; specifically: swapping out of some of my existing world index holdings, buying a corresponding amount pf a relatively high dividend-yielding stock (e.g. a FTSE 100 ETF) just before it goes ex-div, and then selling it shortly after. That would boost my ISA divi income, especially if I found a way of doing it several times a year. There'd be costs (dealing cost, spreads, reduction in the ETF value between buy and sell, loss of growth while holding FTSE100 instead of my usual world index) and risks (market movements during the activity).
Would/should HMRC accept the resulting dividends as income for gifts out of surplus income purposes (they would regard them as income if they were in a dealing account!)?
Ed


Are you planning to die soon? You seem pretty lively to me so why not just give lots of money away now and live for another seven years? :)

I can recommend it and it saves lots of effort.

regards

Howard

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Re: ISA Income and Out of Income Gifting (IHT avoidance)

#456049

Postby scrumpyjack » November 6th, 2021, 12:49 pm

I have never seen anyone trying to argue that ISA income is not 'income' for calculating Income for this purpose and I don't think it makes any difference whether you extract cash from your ISA or not.

Undrawn income in your SIPP would not count because you are not beneficially entitled to it. It belongs to the pension trustee, which is also why it does not form part of your estate for IHT.

Buying income in your ISA sounds like rather an expensive way to 'create' income, though I suppose you could do it where a company for whatever reason is paying a huge divi (eg Tesco handing back the proceeds of selling the far east business.)

I keep a spreadsheet of income, expenditure and gifts to demonstrate gifts are covered taking one year with another, but I do it jointly for my wife and I as our expenditure is co-mingled in joint bank accounts and credit cards. I don't think the HMRC form has any statutory basis but your executors might need to produce reasonable evidence that gifts were out of surplus income so it is sensible to keep the records for them

swill453
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Re: ISA Income and Out of Income Gifting (IHT avoidance)

#456054

Postby swill453 » November 6th, 2021, 12:56 pm

In another thread someone asked about automated monthly selling of units or shares to get an income. Turns out Vanguard do this, in dealing accounts and ISAs viewtopic.php?f=26&t=31946&p=455593

If this was accepted as "income" by HMRC (and I have absolutely no idea whether it would or not) then it would avoid having to rely on dividends.

Scott.

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Re: ISA Income and Out of Income Gifting (IHT avoidance)

#456105

Postby Allitnil » November 6th, 2021, 6:03 pm

swill453 wrote:In another thread someone asked about automated monthly selling of units or shares to get an income. Turns out Vanguard do this, in dealing accounts and ISAs viewtopic.php?f=26&t=31946&p=455593

If this was accepted as "income" by HMRC (and I have absolutely no idea whether it would or not) then it would avoid having to rely on dividends.

Selling units or shares in any form is a capital disposal so it would not be accepted as income.

genou
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Re: ISA Income and Out of Income Gifting (IHT avoidance)

#456193

Postby genou » November 7th, 2021, 10:00 am

Allitnil wrote:Selling units or shares in any form is a capital disposal so it would not be accepted as income.


That's true in the context of IT / CGT; in this context I think it is too dogmatic. I don't see why you couldn't run the argument that if you are invested for Total Return, that harvesting that return is income for IHT purposes. Obviously that means that if you start running down your wealth you are distributing capital, but if it's only the uplifts that are being drawn down, you could certainly argue the toss.

ursaminortaur
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Re: ISA Income and Out of Income Gifting (IHT avoidance)

#456199

Postby ursaminortaur » November 7th, 2021, 10:33 am

genou wrote:
Allitnil wrote:Selling units or shares in any form is a capital disposal so it would not be accepted as income.


That's true in the context of IT / CGT; in this context I think it is too dogmatic. I don't see why you couldn't run the argument that if you are invested for Total Return, that harvesting that return is income for IHT purposes. Obviously that means that if you start running down your wealth you are distributing capital, but if it's only the uplifts that are being drawn down, you could certainly argue the toss.


It would be your executors arguing the toss with HMRC and I don't think you would want to put them in that position.

Lootman
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Re: ISA Income and Out of Income Gifting (IHT avoidance)

#456626

Postby Lootman » November 8th, 2021, 6:47 pm

ursaminortaur wrote:
genou wrote:
Allitnil wrote:Selling units or shares in any form is a capital disposal so it would not be accepted as income.

That's true in the context of IT / CGT; in this context I think it is too dogmatic. I don't see why you couldn't run the argument that if you are invested for Total Return, that harvesting that return is income for IHT purposes. Obviously that means that if you start running down your wealth you are distributing capital, but if it's only the uplifts that are being drawn down, you could certainly argue the toss.

It would be your executors arguing the toss with HMRC and I don't think you would want to put them in that position.

If the executors are also the beneficiaries then they would be motivated to take on that challenge. I know I would.

Executors need to be motivated by having skin in the game.

edwills46
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Re: ISA Income and Out of Income Gifting (IHT avoidance)

#457009

Postby edwills46 » November 10th, 2021, 9:40 am

All, Thank you.
Interesting and informative as usual.
My wife won't agree a substantial PET. Even though our finances are separated, we exercise equal access to the money and discuss and agree (or veto) any large expense. Gifts out of income to an approved person are acceptable.
The separation should make it easier to argue either's case with HMRC in due course.
Yes, it's an expensive way of creating income to give away - an experiment with 25K June thru September had an overhead of 10%, but I recognise mileage may vary.
Right now, I doubt I could muster the arguments or conviction to justify regularly selling investments from the ISA and maintaining that they are income Only the dividend part would count as income if I did the same thing in a dealing account. If someone had done this successfully or would like to take a test case to the courts ...

Ed


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