Chase de Vere’s Patrick Connolly helps a reader with a question.
There have been many questions and answers in recent months regarding gifts in relation to IHT planning. While it is easy to understand the tax rates & reliefs/inheritance tax table printed in Money Observer, could I ask for clarification as to what constitutes ‘income’.
We receive a monthly return from an estate planning bond, and while speaking of this loosely as ‘income’, I would like to know if this income is allowable for the ‘gifts out of income’ option within the HMRC estate planning rules?
I seem to recall from a past article that ‘income’ from bonds is classed as a return of capital and therefore would be ineligible for inclusion when calculating total income to convince HMRC that we could afford the gifts out of income.
This seems a grey area, with what appears to be a tussle between executors and HMRC. Perhaps you will be able to clarify the situation.
Gerald Williams, by email
Patrick Connolly of Chase de Vere replies: You are referring to the ‘normal expenditure out of income’ exemption, where gifts which meet this criterion are considered to be immediately outside of the transferor’s estate for inheritance tax purposes. To qualify, any gifts must be made out of the transferor’s normal expenditure, be made out of income and leave the transferor with sufficient income to maintain their usual standard of living.
In terms of what qualifies as income: common sources of income are employment and self-employment, rents from property, pensions, interest and dividends. However, what is considered to be capital under normal accountancy rules would not be classified as income for this calculation. This would include, for example, the capital content of a purchased life annuity and also payments from insurance bonds.
The text below is an extract from the HMRC Inheritance Tax Manual: “A person may receive payments from insurance policies in a number of situations... Some of these payments are chargeable to income tax, but that does not make them income. Even if the payments are regular, the character of such payments is usually capital and they cannot be taken into account in calculating the income available to a transferor. A common situation is where a person takes annual withdrawals equal to 5% of the premium from a single premium policy.”
If you need help with a tax, pension or financial planning problem, please email: firstname.lastname@example.org