Ask a planner answers: gifts out of income

Tuesday, June 7, 2016

The question, from N. Larry, 66 in Bridlington

What constitutes income as to “gifts out of income” e.g. could I divert dividends rolling up in my self-select ISA?

The answer, from Lance Baron CFPTM at Tucana Financial Planning - An Accredited Financial Planning FirmTM

To begin with, I have covered the basic requirements for gifts made as part of normal expenditure out of income to qualify as exempt gifts for Inheritance Tax purposes, since if they do not meet the three basic criteria, then they will not qualify, regardless of the source of income.

  1. The gift must be from income i.e. not from capital;
  2. The gift must form part of a pattern or it must be intended to;
  3. The gifting of the income must not undermine your standard of living

Income from dividends would be deemed to be “income” for the purposes of the exemption; however, it should be made clear that HMRC guidance suggests that if the income has rolled up in previous years, it is then considered to form part of capital and will not qualify for the exemption. Thus caution must be exercised where income has been accumulated.

To establish that the gift forms part of a pattern, proof is either in the form of a prior commitment (ideally to be made in writing) or by reference to a sequence of payments i.e. the longer the payments have been in force, the less will be required in terms of proof that they were intended to form part of a pattern.

This exemption is not given automatically and has to be claimed retrospectively by your personal representatives on death using IHT Form 403. This should be used as a guide for the level of detail required to establish a successful claim for this exemption. 

Lance Baron CFPTM
Tucana Financial Planning

Disclaimer: This material is for general information only and does not constitute investment, tax or legal advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice which is relevant to your own particular circumstances.