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When capital can become income contributing to excess income so no IHT.
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Geoff Fitz
Posted: 27 January 2025 16:00:44(UTC)
#1

Joined: 21/02/2024(UTC)
Posts: 82
I posted recently on the issue of using capital to top up day to day living costs how this appears not compatible with HMRC guidelines if you want to give regular sums claiming excess income to avoid paying IHT. On reflection I think there is an easy way to increase income but not come from capital, I would welcome the thoughts of others to see if they think this fits.

Hitherto in my ISA or GIA (from where my capital top ups have come) I have all my funds as accumulation units or automatic re-investment of dividends. Hence from the ISA perspective I never see any income, interest or dividends. But IHT 403 form allows permissible income to come from interest (PEP’s and ISA’s) and investments for the purpose of excess income for IHT. Currently I allow the accumulation units to appreciate then cash some in for the capital top up. If some/all of the accumulation units were converted to income units and no dividend reinvestment I believe I can withdraw the funds legitimately as income, this could then be added to my SIPP income and count as excess income. In effect it would be the same money as the capital but as it is coming from the income funds and is a regular distribution it's not capital. If I had no pension but £1m in ISA’s and was taking income more than I needed, it would be excess income. In addition if I did not need all the income from a particular year I could reinvest it.

So I believe you can take the money out of the ISA if it is derived via income units and dividends issued on a regular basis rather than taking ad hoc capital sums as and when needed.

Please correct me if I’m wrong.
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jeffian
Posted: 27 January 2025 16:53:04(UTC)
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Joined: 09/03/2011(UTC)
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"Hitherto in my ISA or GIA (from where my capital top ups have come) I have all my funds as accumulation units or automatic re-investment of dividends. Hence from the ISA perspective I never see any income, interest or dividends."

You may not "see"/draw it, but it is still regarded as income by HMRC. In a GIA the assumption is that the shareholder receives the cash benefit of the dividend and chooses to reinvest it in more shares, so it is taxable. Just because ISAs are tax-free doesn't mean that the same principle doesn't apply. I think you can claim your DRIPs as income anyway without jumping through hoops.
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MarkSp on 28/01/2025(UTC)
Geoff Fitz
Posted: 27 January 2025 17:05:54(UTC)
#3

Joined: 21/02/2024(UTC)
Posts: 82
Jeffian,

Good point.

I completely agree on the GIA front as unit trust dividends and interest are visible via the consolidated tax certificate. As there is no tax certificate from an ISA the dividends and interest which are accumulated via the accumulation unit route are not visible and I'm not sure where this information is available from.
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Newbie
Posted: 27 January 2025 17:25:36(UTC)
#4

Joined: 31/01/2012(UTC)
Posts: 3,818
Do not forget to satisfy the "regularly" rule.

Are you taking regular income and
Are you gifting the income regularly

Both need to be satisfied for the gifting from income rule.

If you switch everything to income units but never draw on it, whilst for income tax it will nevertheless be subject to income tax either way (or simply no taxable income if in an ISA) but, you do not draw on it or gift it away regularly, then it does not pass the gifting from income rule. A one off general gift is considered a gift out of capital.

Hence better to do it regularly, monthly, quarterly
One you get to half yearly and yearly you will need to demonstrate that you have been doing it for some time
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Geoff Fitz
Posted: 27 January 2025 17:51:13(UTC)
#5

Joined: 21/02/2024(UTC)
Posts: 82
Newbie,

The regularly point is well made.

But I would have taken say £12-15K out each year as and when required but not regular amounts of say approx. £1K. It's just about converting the £12-15K odd lumps to regular £8-1200 sums say monthly. If it comes from an income unit there can be no dispute. What if I take £12k at the beginning of the tax year and then take £1K each month as income. Much fewer hoops. It would be defined a regular and it would be from investments and it would be my income.

The regular element is absolutely key.
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Newbie
Posted: 27 January 2025 18:11:05(UTC)
#6

Joined: 31/01/2012(UTC)
Posts: 3,818
Geoff Fitz;332400 wrote:
Newbie,

The regularly point is well made.

But I would have taken say £12-15K out each year as and when required but not regular amounts of say approx. £1K. It's just about converting the £12-15K odd lumps to regular £8-1200 sums say monthly. If it comes from an income unit there can be no dispute. What if I take £12k at the beginning of the tax year and then take £1K each month as income. Much fewer hoops. It would be defined a regular and it would be from investments and it would be my income.

The regular element is absolutely key.

The problem with "as and when" is that it you cannot show a pattern or regular gift.

Now if, say you did it this year and gifted the whole lot, but passed away next year, it could be argued that your income was neither regular nor was your gifting. Instead you simply took out capital from your pension and gifted it knowing you would not have needed it for if you did then you would have spent it - Similarly given your habit is to take it out as and when you need it, suggests that you plan your expenditure and it would be safe to assume you took a lump sum on this occasion knowing you would not need it - thus avoidance.

So better take it our regularly (or as you put it "take £12k at the beginning of the tax year and then take £1K each month as income. Much fewer hoops. It would be defined a regular and it would be from investments and it would be my income)

Then it needs to documented thoroughly - belt and braces.
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KMH on 28/01/2025(UTC)
KMH
Posted: 28 January 2025 10:54:19(UTC)
#7

Joined: 26/03/2012(UTC)
Posts: 23
"If it comes from an income unit there can be no dispute."
This is not what we understood, so can this be confirmed?

We expected you could only take the dividends which the unit produced.
Unless maybe you can demonstrate you bought the units with income and not capital gains. Admin???
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Dexi
Posted: 28 January 2025 11:25:19(UTC)
#9

Joined: 03/04/2018(UTC)
Posts: 1,751
There are a few higher or " enhanced " income funds available that could be used to legitimately convert capital into income for IHT purposes .JPM do a range of trusts that do this ( JEIP JEGP ) Then there`s HFEL ( caution needed with this one though ! ) .
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D Bergman
Posted: 28 January 2025 12:28:48(UTC)
#8

Joined: 22/03/2018(UTC)
Posts: 1,308
KMH;332429 wrote:
"If it comes from an income unit there can be no dispute."
This is not what we understood, so can this be confirmed?

We expected you could only take the dividends which the unit produced.
Unless maybe you can demonstrate you bought the units with income and not capital gains. Admin???


No.
All income is considered to have become capital after 2 years, so the source of the units is irrelevant.
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Geoff Fitz
Posted: 28 January 2025 18:07:15(UTC)
#10

Joined: 21/02/2024(UTC)
Posts: 82
The IHT 403 form asks for you to declare income from investments.

This is my scenario I have typically £100K in investments none of which really pay a dividend but the value has grown from the £55K book cost I paid. I sell £14K which gives a total sale of £14K and a capital gain of £2.8K. I then pay my self £1160/ month for the next 12 months as income.

This is income from investments and because it is regular I see no reason why this cannot be included. It can't just be the dividends or interest from the investments. In addition without good management I would be liable for CGT.

So if you sell investments and pay yourself regularly a similar amount that is income.

Where am I wrong?
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