I've just checked IHT403 and part of our IHT plan for my mother in law seems to be ok.

That is to calculate, early in a new tax year, the total of interest and dividends received in the previous tax year within ISAs and pay that away as a gift out of surplus income and so immediately exempt from IHT.
The payment itself being made from taxable cash savings accounts so mitigating the ongoing income tax bill.

I do not believe that it would be permissible to take cash out of cash ISAs, other than the previous year's interest per above (supported in advance with a suitable letter to the intended beneficiaries), as that would be gifting out of capital and not surplus income.

Unless anyone thinks differently?

PR

Thanks Bill.

The MIL doesn't spend her pension income so I think this is pretty safe from HMRC argument/obstruction.
I'm keeping detailed records.

PR

I'm late to this party and I need to read through it several times to get the real flavour.
I, too, am considering upping (from Zero) my SIPP withdrawals and gifting the resulting income as surplus to requirements.
But I am horrified to see HMRC's simplistic and Victorian view that Capital and Income are so separate that spending capital as one's income is not acceptable. I seem to have been breaking that law for the whole 12 years I've been an investor.
My guiding principle in investing has been that return on investment is what matters, and whether it arises from capital or income matters not, other than on my SA return.
Does HMRC seriously think that I must abandon value investing and only invest for income, at least until I reach my annual income goal.
So if I want to live on, say, £35,000 a year it's implicit that I invest in stocks generating that amount of income. By my reckoning that's investing £1m. I don't have that much.
It's a truism that real return in investing cannot possibly come from income investing. That's why I've avoided it.
Now I must reveal that I was a Chartered Accountant tax specialist for 35 years. I was forever telling my clients we must not allow the tax tail to wag the dog and here is HMRC forcing us, or at least me, into exactly that.
Looking back at the past 12 years I have no annual pattern of expenditure nor annual goal. I just drew what I wanted if I considered it prudent at the time. Analysing from where each amount arose, and also whether the expenditure (of which I've kept no record of destination) was income or capital would be a huge task, highly subjective, and endlessly arguable.
If HMRC have the time to pursue personal expenditure issues then the tax tail is wagging the cloud-Cuckoo.

In reply to DBergman

Not at all. I make no such link. But thanks for raising the point.

I have identified MIL's spare income (in the form of interest and dividends as HMRC says is ok) and by paying that sum of money away from her estate from accounts which are subject to tax on the interest (ie accounts which are not ISAs) has the happy additional benefit of reducing her liability to income tax on the interest accruing on that account going forward as the balance in that account reduces and the balance in the tax sheltered ISAs increases.

HTH

PR

If the difference in tax is several hundred thousand pounds I think you may find that they do have time to pursue it! Whatever the arguments we have to accept that hmrc treat income and capital completely differently in all sorts of areas, that's just how the system works. And in this case the "gifts out of income rule" is a benefit in that the general principle is that you have to live for 7 years for gifts to be outside the estate.