Taking FAD to create income to gift
benjaminfabi
Moderator
Hi,
I'm interested in how others are approaching taking pension income to create a surplus to gift within the exemption available for gifts out of normal expenditure.
Assume gifts meet the three tests:
- formed part of the transferor’s normal expenditure (IHTM14241),
- was made out of income (IHTM14250), and
- left the transferor with enough income for them to maintain their normal standard of living (IHTM14255).
I can easily imagine a near future in which 'flexible income withdrawals taken from a pension scheme, that are not needed by the donor to maintain their existing standard of living before any regular gifting, will not qualify for the exemption in IHTM14231' is a simple change to make.
I'm interested in what others think about this risk.
Benjamin Fabi
Comments
There is already a school of thought that as you have access to your total drawdown pot that it is actually capital (I don't share that thought).
Planning that relies on existing rules still being available in future or requiring claims on death are just inherently risky.
I don't think HMRC will be overly concerned about this one personally as they will be reaping the income tax.
And... I think the likely outcome would be they just say unless it's an annuity then it's capital.
It's a fair point but I don't agree with it either. It's non-savings income taxed at source via PAYE. I simply think MPs could amend the law to 'look through' flexible pension income payments that only exist to make use of the exemption. As it is today I don't think there is a problem with it and I would plan today assuming that a change would come with a transitional protection for those who acted in good faith in reliance of the current rules.
I do think the case for using annuities is far stronger, as there are a lot of very good reasons to bank an annuity today, and as a by-product of that planning create a surplus income that can be gifted. It's the variability (eat your cake and have it) of the FAD route that gets me thinking it will be attacked.
Yes, I'm writing an article and planning a webinar on annuities as wealth transfer vehicles.
Yes but protection wise I suspect gifts already made that qualify would continue to qualify it's just future gifts that would be affected - which could be an issue for those funding WOL!
Anyone using NEOOI shoudl run on ther assumpiton they could have 7 failed PETS in their estate I think.