With SIPP’s becoming chargeable to IHT one might expect more interest in accumulating surplus income in a discretionary trust.
Grandmother in her 90’s is already making quarterly gifts of substantially all of her ISA income as it arises (which she doesn’t need to live on) to her retired children in their 60’s. Some of them are wealthier than others. If they want to pass it on using the same exemption, will HMRC accept the regular gifts received as income in their hands to establish how much they themselves could gift into a DT?
HMRC manuals talk about accountancy principles to determine what is income (presumably as opposed to capital). Obviously the amounts were income in the hands of the grandmother. Particularly if they are established as a regular stream of receipts, it seems arguable they maintain their revenue nature when passed on to the recipients. Grandmother is not using capital to fund the gifts.
Has anyone come across this point?
[Grandmother wouldn’t feel comfortable giving these amounts directly to grandchildren (for whom she is already paying into SIPPs).]
IHTM41250 states income is not necessarily the same as income for income tax purposes, and all commentators in articles on the gift exemption I’ve read so far concur that non-taxable income such as premium bond winnings and ISA income are income for the purposes of the exemption.
Income is not defined and so has its normal meaning (whatever that means). There is nothing in IHTA or case law to say it has to be taxable or not. Similarly, there is nothing that says that just because something is taxable as income under ITEPA it is income for IHTA purposes (I’m thinking about chunky irregular withdrawals from pensions here).
I don’t believe that “normal accountancy rules” determines whether something is income or not. I just don’t see the basis for HMRC saying that normal accountancy rules overrides a normal meaning of income. They may have a great reason for believing that, but I’ve no idea what it is.
One reason for this is I don’t know where to find those normal accountancy rules written down. If you ask me what the accountancy rules are for share-based payments, I can tell you off the top of my head what some of them are or were and that they can give very different answer in different circumstances (e.g. current UK GAAP, IFRS2, FAS123R, FAS123, UITF17, APB25, etc). But I am not aware of any accountancy rules written down that determine what is, or is not, income for individuals.
Putting my ignorance aside, let’s say HMRC are right and I do need to decide what normal accountancy rules are to a regular monthly gift. I think you first need to understand the facts around the recipient and the intention of the payer. But I cannot see absolutely no reason for saying that the nature of the receipt (income for the recipient?) depends on whether the payer had surplus income or not.
So let’s make up some facts. I’ll assume grandad has a granddaughter. Granddaughter married a nice bloke, his parents got ill, they both gave up their well paid jobs and moved to a Welsh hill farm to look after his parents’ animals. And theythen have their first child. Grandad recognises the massive loss in family income, the extra expenses of a new baby and decides to pay £300 per month to his granddaughter to support her costs. To me, as far as the granddaughter is concerned, that £300 per month is income. I don’t need to consider normal accountancy rules to believe that.
But let’s say HMRC is right. How do I apply accountancy rules to it? I’ve no idea as I never seen any accounting guidance on grandads giving money to granddaughters because they love them and want to help them out. Looking for analogies, it sounds a bit like the government giving a grant to an entity. So I look at IAS 20 (or section 24 of FRS102 if you prefer). These make me ask the question as to whether the grant is revenue or capital in nature. A grant to meet expenses (rather than to buy an asset) would be revenue in nature [IAS20.20]. So that means that the grandad’s £300 per month (expected to be used to cover extra baby expenses) would be revenue in nature and so, if you believe HMRC normal accountancy principles view, would be “income”.
Let’s change the facts a bit. Granddaughter is doing really well and buys a house for £100,000 but ends up with a £36,000 mortgage. Grandad says I’ve got £300 per month spare and so I will give you £300 per month extra so you can use it to pay off your mortgage. Applying IAS20, that now sounds like a grant relating to an asset (i.e. the house). Under IAS20 [IAS20.24] that would be either (i) deducted from the carrying costs of the asset (so not income), or (ii) recognised as deferred income that is amortised over the asset’s useful life (so income). So now the “income” nature of the £300 per month (for IHT purposes) depends on how the granddaughter would, if she was bothered to think about it, account for the money she receives. That’s a bit silly.
So for me you end up with two different answers depending on how you squint at only-very-slightly-relevant accounting standards and you end up with (i) its income, or (ii) you can choose whether it is income or not.
One advantage of applying IAS 20 though is that it means that attendance allowance is clearly income (which may matter for how much grandad can give with the exemption). But as I say, I don’t think you need to use accountancy principles (if there are any for recipients of attendance allowance) to decide that.
So trying to answer the OP’s question. In most cases I would say that regular payments received by the retired children would be income. But I would want to understand the actual facts (e.g. 90 year old is in poor health and have 12 months to live so she gives 1/12 of her estate to her kids each month). I’m not saying that would not be income, but I’m not convinced it would be.
Thanks Tigger for some interesting points. I’ve re-read IHTM and you’re right there is some arguably mixed terminology being used, but it seems to me to be written by somebody at HMRC from the underlying position
Income isn’t defined for this exemption by statute. So “ordinary meaning” it is.
For determining profits for business tax the revenue/capital divide has a lot of case law, but acceptable accountancy treatment does count for something. {But how do you read across “rules” to individuals, like you say).
A recurring stream of payments is more likely revenue than capital.
But disguised returns of capital won’t be income, even if regular.
In the scenario I’m looking at the grandparent certainly isn’t eating into her net worth by making the gifts - the ISA income if not gifted would just increase her estate. So no disguised capital depletion at that end.
I hadn’t considered that what the recipients do with the gift as determinative - one daughter probably just adds it to her savings whilst the other finds it really useful to cover her household costs. It would be odd if it only counted as income if you needed it to cover a shortfall in your own income.
I agree. I don’t think it should be determinative in the slightest. But if you start going down some “normal accountancy practice” approach and decide that how entities account for government grants then you might get some weird answers.
Non-taxable income is income within s21 IHTA 1984. As far as I know Richard’s contrary view is unique. HMRC’s direction could and should have been clearer: you net off income tax “if any”.
Giving away income from ISAs is something we have done ourselves. As a former FCA I am terminally sceptical about the use of GAAP for tax purposes even where they specifically apply. The Boffins who invented Lease Accounting should be banished from the realm. Remember that they wanted to apply the same principles to leases of real property, definitively calling into question their own highly distinctive psychopathology. Tigger’s tour de force exposition of accounting standards is wide of the mark here. What HMRC have in mind with s21 and an accountancy approach is that “income” does not mean income for income tax purposes. It thus excludes that renegade list of capital items liable to income tax. Such as life policy gains, OIGs, short lease premiums, and the cum div bits taxed under the Accursed Income Scheme.
Apart from these exclusions HMRC regard income as having a common sense meaning: what a judge would accord to the word as being an ordinary word in the English language. Not interpreting it as a technical term as the legislation fails to mandate that. So far from importing GAAP it precisely does not.
It is one of the least controversial elements of the exemption, compared to what is “normal” for instance and in any given case how the gift is to be made to minors, which is often desired, and raises the baleful prospect of the use of trusts other than bare trusts and the investment of the gifted monies.
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A key point with ISAs is to give away income which has become due and payable, not which is rolled-up and payable at the end of a fixed term of more than a year. But there is no elaborate “following” mechanism as in restitution or “ tracing” as in equity. You can spend capital funds to make the gift as long as you have the regular pattern net disposable income you have promised to give away.
Of great importance is for the donor to demonstrate that expenditure by way of the gift in question is “normal” viz, capable of recurring in a regular pattern, where this is not inherently self-evident as is a commitment to make periodic gifts of premiums on a life policy. A commitment by an informal promise, written for evidence, is sufficient but HMRC will expect two or three regular payments of cash gifts (not transfers of assets in kind) to be made before they concede. A formal covenant under seal to make future payments (nowadays outside the tax system for covenantor and covenantee) arguably should attract exemption from the very first payment on the same basis as a life policy with regular premiums does.But this entails a legally enforceable obligation which cannot be unilaterally exited e.g. if income unexpectedly falls in amount and the plan has to be aborted.
Care is needed in defining how much is promised in conjunction with the interest profile of the ISA investments selected, especially if the donor wishes to vary them in line with market offerings. You can give away all or a specified proportion of your ISA income but care is needed if that income naturally fluctuates because of the varying interest due and payable dates that you have chosen or which the provider imposes. If you have only 2 year ISAs paying interest at the end of the term and want to renew them on the same basis or for longer it is going to be tricky and you may have to select instead those that pay interest more often, perhaps even with a lower rate of return .
I have advised more taxpayers on this exemption than hot dinners. It concerns me that this forum is read by new practitioners or non-tax experts and even Joe Public and some contributions on here are offered by people who even candidly admit that they do not know what they are saying but are going to say it anyway. No one seems to moderate technical content and these quasi-erudite perorations are dangerous. Although I have a Ph.D in Gratuitous Offence it is invidious even for me to feel obliged to point out that some of this apparently sophisticated wisdom is fake news and not even a tenable opinion. I hope none of these contributors are also attempting Brain Surgery.
The many responses are very interesting; but the original question seems to have been lost. Perhaps it is because those who have replied have implicitly dismissed the idea that regular gifts received can be part of the recipient’s income. I certainly agree with conclusion.
Jack refers to -
A formal covenant under seal to make future payments (nowadays outside the tax system for covenantor and covenantee) arguably should attract exemption from the very first payment on the same basis as a life policy with regular premiums does.But this entails a legally enforceable obligation which cannot be unilaterally exited e.g. if income unexpectedly falls in amount and the plan has to be aborted.
What if the amount covenanted were expressed in terms such as ‘the amount my income [defined] exceeds the amount required for me to maintain my normal living standard’?
Before giving up, I was indeed hoping to pinpoint the rationale for the implicit dismissal of what is a stream of regular receipts as “income”.
Incoming gifts don’t arise from one’s "business, lands, work, investments, etc,. " (OED). Maybe thats the end of it, but there other kinds of receipt that don’t appear to meet the OED definition either which an ordinary person might still regard as an individual’s income, such as state benefits (e.g. attendance allowance) or even a monthly allowance from a wealthy relative.
Non-taxable income is income within s21 IHTA 1984. As far as I know Richard’s contrary view is unique. HMRC’s direction should have been clearer: you net off income tax “if any”.
We don’t advise clients to use investment ISAs in relation to IHTA s.21 as we have on several occasions asked HMRC via non-statutory clearance asked for “clearance”. To date we have not had a definitive “yes” - it’s the usual read the caselaw - it’s down to tax advice.
As I stated above I’m NOT saying the OP is wrong or you CAN’T use ISAs - I’ve stated ny experience.
As Ray/Geoff has suggested in terms of to the actual question - how can gifts of money from any source (lets forget the ISA element) become income?
Going back to the original query, in order to circumvent entirely the question as to the nature of the gifts in the children’s hands would it not be far better if the grandmother herself made regular gifts of her surplus income directly to a discretionary trust/trusts for her family rather than to her children outright. In this way if the exemption for normal expenditure out of income applies then she would never be liable to IHT entry charges for doing so and if the amounts are substantial and she wishes to reduce the incidence of future ten-yearly charges she could use more than one trust to do so since previous exempt gifts will also not cumulate for the purposes of determining the NRB available to those trusts at each each ten year anniversary.