Would annual gifts from my SIPP drawdown income qualify for inheritance tax exemption?

Hi,

I'm trying to get some clarification on gifting from income - I have a SIPP which has been crystallised and is in drawdown. I am thinking about emptying the SIPP over the next 10 years by taking an annual income which will exhaust the funds. I don’t need all of the income, so if I annually gift what's left, will this be treated as gifting from income for inheritance tax purposes?

Thanks!

Hi PC,

Regular gifting out of surplus income can be a great way to help others, whilst reducing a potential inheritance tax (IHT) liability. This uses the “normal expenditure out of income” exemption, but it’s important to ensure that certain conditions are met and to keep records of gifts made.

In particular, there needs to be:

1. Regularity: gifting needs to indicate a pattern or habit of payments, but the term “regular” is not defined by HMRC. It could be at least annually, but the key point is to be able to demonstrate that such gifts are made from normal income, not from capital.

2. Maintenance of lifestyle: after making such gifts, you still need to have sufficient income to maintain your usual standard of living – without needing to draw down on other capital assets.

3. A source of income: drawdown from a SIPP is considered to be income and not a withdrawal of capital, so as long as you can demonstrate a consistent pattern of gifting that does not compromise your standard of living, the gifts should qualify for the IHT exemption.

It’s important to recognise that record keeping is key, including details of income, expenditure and the dates and amounts of gifts made. This will be needed so that your executors have the evidence to claim the exemption upon your death.

Hope this helps.