HMRC say in IHTM 14250 that withdrawals from discounted gift trusts are not “income” for these purposes, but give no other examples.
Doubt has been expressed by some as to whether pension drawdowns are income for these purposes. It seems to me it would be very odd if this was the case-has anyone had problems with this in a claim?
HMRC have in the past said the 5% withdrawals from investment bonds, although subject to income tax, are not income for the purpose of NEI; however in 2005 Peter Twiddy, the then head of the CTO, said HMRC had changed its mind on this. Does anyone have any more recent evidence as to their attitude now?
Payments from annuities have also I believe been the subject of enquiry by HMRC if included in a NEI calculation-as these payments are part income and part return of capital-so again does anyone have evidence if HMRC still take this approach?
I believe their attitude re 5% withdrawals is that such are still treated as non-income for NEI purposes.I’m not convinced re HMRC arguments re the 5% but don’t know if any challenge has been successful?
Regarding annuities does not IHTA 1984 s21(3) cover the point?
Regarding pension drawdowns I have no idea as to HMRC’s attitude but find it difficult to see how any drawdown cannot be regarded as income for NEI purposes.
I haven’t checked but I suspect this exemption goes back to antiquity, to 1910 probably when I think gifts inter vivos came into charge. The IHTA did not benefit from the Tax law Rewrite so it is full of dusty corners. And there is no official enthusiasm for reform, despite a great appetite to investigate and litigate it on the part of HMRC. It is the permanent mission of HMG/HMRC to convert capital receipts into income if outside the CGT net. Malcolm rightly cites the chargeable events legislation and its 5% rule. The Lobler litigation on this area of tax is a shocking saga of how unattended law can become unfit for purpose to the point of embarrassment of even the powers that be.
This exemption needs a conceptual overhaul and modernisation not just on the definition of income but also on the taking one year with another nonsense, so that an insurance premium can qualify after one payment. The modern pension withdrawal charge itself is fair: deduction in, tax-free growth, tax on the way out subject to a (generous) tax-free lump sum. A drawdown is taxed as income, looks and smells even more like income given the above rationale, but can fall foul of the regularity aspect of this exemption, with all the mumbo jumbo of intention to repeat/ historical pattern of doing so.
There is no tracing requirement so if the rudimentary formula results in positive net income it matters not if the gift is funded from capital. While a one-off pension withdrawal may be income (logically despite being exempt from income tax) it will not pass the regularity test even if actually used to traceably fund a series of subsequent annual gifts. Whereas a series of annual withdrawals would do so even if not actually used to fund them directly.
The justification for the exemption is not unreasonable but it does pre-date the (miserable) annual exemption and PET regime. Pressure for reform risks abolition. It is very valuable as it requires no survival for 7 years. I would be happy with a blatantly documented plan to make a series of withdrawals to fund future gifts within the exemption with a view to claim it (as HMRC insists) if need be even after just one such gift. A plan do so from a single withdrawal seems doomed to failure however many future gifts it actually funds, though it is at least income for the basic statutory test in the year of receipt.