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.
HMRC seem to insidst on a need for a regular pattern of gifts. They infer that is an implication of a gift being part of ‘ordinary expenditure’. I suggest that it is gifts that are extraordinary expenditure that should be identified.
For example -
Suppose a very wealthy man throws a very lavish coronation party; spending £300,000 on food, drink and live entertainment (orchestra, choir, magician, etc) and souvenirs for guests. He meets the cost from income without any reduction in his standard of living. Sadly he dies 6 months’ later. His PRs cannot suggest this was the first of an intended series. But need they? S.21 makes no reference to a series of gifts.
The series concept is linked to the word “normal”, so that repetition connotes normality. Your party giver seems to have celebrated a one-off event. If he threw one such shindig regularly on his birthday it should qualify. Hospitality is a very dubious area for IHT. If you throw a party initially you get what you pay for so no TOV: is the subsequent provision of free food and drink for guests really a disposition reducing your estate? If so it seems bound to fail the section 10 override.
I am afraid that it is like the answer to the question: why is the cost of keeping and racing a horse tax non-deductible? Because inspectors of taxes don’t do it. It is also why free parking spaces “at or near” work are not taxable as a BIK: EIM21685
HMRC seem to be convinced that gifts that form normal expenditure MUST follow pattern. I suggest that they should first identify the gifts that are abnormal expenditure, made from cash income or from capital. The balance - the excess of income over such cash gifts - may then be compared with the donor’s normal living costs to see if they are impaired.
The series concept is linked to the word “normal”, so that repetition connotes normality. Your party giver seems to have celebrated a one-off event. If he threw one such shindig regularly on his birthday it should qualify. Hospitality is a very dubious area for IHT. If you throw a party initially you get what you pay for so no TOV: is the subsequent provision of free food and drink for guests really a disposition reducing your estate? If so it seems bound to fail the section 10 override.
I am afraid that it is like the answer to the question: why is the cost of keeping and racing a horse tax non-deductible? Because inspectors of taxes don’t do it. It is also why free parking spaces “at or near” work are not taxable as a BIK: EIM21685
Many people have been disappointed with me on many occasions during my lifetime but so far none has been able to penetrate my indomitable self-esteem.
IHTM14241-14255 sets out the long standing position of HMRC on this exemption, including the pattern point at 14242. There are no weasel words about referring particular cases to Technical or claiming FOI exemption.
They claim their practice to be based on the cited case-law of which there is a paucity. There could be manifold reasons for that but one reasonable conclusion is that taxpayers have rarely been prepared to challenge HMRC. While they have the profession by the throat, using the PCRT as a convenient ligature, and expect paid PRs to make a full investigation and disclosure to justify the exemption, the great unwashed tend to have the conscience of a well-trained hippopotamus and the Nelson touch: this may partly account for the dearth of reported cases, judging by the naivety of those who under cover of LPP have sounded me out on schemes which I advised constituted evasion.
The contents of Manuals are not holy writ. They may be actionable if unambiguous, by way of defence or judicial review if not followed in a way that is Wednesbury unreasonable. In Sippchoice HMRC instructed Crown Counsel to successfully argue that the Manual was wrong in law so not binding on them. This is punk litigation but it is state of the art however I might excoriate it.
So Manual contents are not always the entire picture nor can be safely relied on in formulating tax planning. They can be self-serving but save by omission (e.g. from 2003 to 2019 non-publication of their settled position on the meaning of “dwelling-house” for SDLT) never actually mendacious. They do however constitute more than ample advance notice that any plan which deviates materially is likely to meet with strong resistance.
Most are prepared for that very reason to accept the pattern requirement even though the authorities, such as they are, have only been decided at first instance. Judges can be overruled on appeal and Counsel lose in every decided case.
My usual advice was to treat any official public promulgation of HMRC’s settled view as a safe harbour but, if fully aware of the downsides, to take them on as far as their budget and common sense dictated. Many of my clients loved nothing more than to stalk the Beast but some could not brook the cost, hassle, uncertainty of outcome and publicity. Good poker players know when to fold.
Now that payments under covenant have no income tax consequences for either party they arguably establish a pattern from the first payment like a policy premium and drafting ingenuity can facilitate fluctuating amounts. Similarly the “HMRC approved” methodology of calculating “income” is a safe harbour which anyone is free to challenge by purchasing the necessary lottery ticket.
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