Gifts out of surplus income: dividend distributions

[Tenareze]

My wife and I make monthly payments to our three grandchildren by way of bare trusts. These payments are made entirely from surplus income in order to benefit from IHT exemption. To assist our executors, we keep detailed records of all income and expenditure to correspond with the sections of the IHT403 form.

We have various sources of income. One source is dividend distributions within our ISAs. To qualify for IHT exemption, must this income be withdrawn or can it be left within the ISA (as part of the cash balance rather than reinvested)?

Your advice would be much appreciated.

[pawncob]

My feeling is that until it's in your bank account, it's not income.

[Tenareze]

Thanks, pawncob.

At the moment, the monthly gifts are paid out from our joint bank account on a 50/50 basis. We split our expenditure 50/50 except for one specific category which is wholly mine.

Omitting dividend distributions from our total income has no adverse effect at all on my own surplus-income gift margin. However, looking back over the last seven years' records for my wife, it will do so in two particular years (by about £640 and £165 respectively). The other five years all have a healthy margin averaging about £1200.

On the understanding that HMRC "takes one year with another" for exemption eligibility, are these two shortfalls likely to be regarded unfavourably? If so, is it permissible to alter the gift ratio (to, say, 60/40), even though the gifts originate from a joint account?

I suppose another alternative could be to convert her ISA funds to income-generating funds and withdraw the income?

[pawncob]

Are the overpayments "material" or "insignificant"? That depends on the total gifted and is open to interpretation.
I wouldn't worry about it, as the chances of HMRC picking it up are very small.

[Tenareze]

Thanks again, pawncob.

We're very happy to follow your "don't worry" advice!

However, we also want to have a contingency plan in the event that my wife's income should become insufficient to cover her 50% of our gifts.

As I understand it, it would be ok to apportion the gifts in the ratio of income. If this is correct, this would be simplest solution.

Is this a sensible way to proceed and would it be acceptable to HMRC?

[pawncob]

Yes, that makes sense.

[Tenareze]

Thanks, pawncob.