Premium Bonds wins - treated as income or capital?

Premium Bonds wins - treated as income or capital?

Didn't find your answer?

A relative died recently and I am trying to sort out her estate.

She had Premium Bonds to the total amount permitted, and won prizes regularly.

When she won prizes she paid these wins into a particular savings account, then at Christmas she would divide the amount in the account by 3 and give 1/3 to each of her 3 children, to a maximum of £1000 each.

She was under the impression that these wins were treated as tax-free income, and as this was surplus to her daily requirements, she could give it away as surplus income, in addition to the £3000 annual gift allowance.

Was this indeed correct, or would IHT be due on anything she gifted at all over £3000?? How would the wins be treated for IHT purposes?

Thanks in advance for any advice.

Replies (26)

Please login or register to join the discussion.

RLI
By lionofludesch
06th Feb 2021 07:15

Sounds like a gift out of income to me.

How long had she been doing this? Long enough to establish a pattern?

Thanks (0)
Replying to lionofludesch:
avatar
By Paul Crowley
06th Feb 2021 12:22

CLEARLY gifts out of income that she can afford
@OP Stop and forget this trivial nonsense

Thanks (1)
avatar
By Hugo Fair
06th Feb 2021 11:08

I feel the question (to which I don't know the answer) should be whether PB winnings count as 'income' - particularly in the IHT context of "normal gifts out of income"?

Also, in my experience, you can't just assert that the gifts are made out of surplus income ... you may have to 'prove' month-by-month (a spreadsheet is useful here) the size of the 'gap' between total expenditure on self (i.e. maintaining standard of living) and total income. Ideally you'll need a complete set of bank and credit card statements for 7 years before you start (good luck if you have to obtain these).

The reason I mention month-by-month is that HMRC really don't like this rule, so have been known to refuse its application where the maths works for the tax year in question but not for some of the gifts in the month they were made!

Also, as lionofludesch mentions, they tend to place a lot of emphasis on the need for a pattern to be established for the gifts - although I'm not sure of their right to do so (and have persuaded them otherwise when agreeing several estates).

However, my main concern with the OP is "wins were treated as tax-free income, and as this was surplus to her daily requirements, she could give it away as surplus income" ... which is a non sequitur. The fact she felt they were surplus is not the same as the rigorous 'proof' - suppose the day after banking her winnings she gets an unexpected bill (for boiler repairs or whatever) ... this could consume the surplus even if she saves up to 'repay' it later in the year.

So I also agree that it sounds like a gift out of income to me ... but with a lot of caveats depending on the actual circumstances (as always)!

Thanks (2)
Replying to Hugo Fair:
avatar
By Tax Dragon
06th Feb 2021 14:47

I'm struggling to believe that premium bond winnings were enough to cover regular gifts of £3000 pa. Even before the rates reduced.

So it's an interesting question. Suppose she was gifting everything she won - say £1k pa - then had a big win - say £50k - and upped the annual gifts to £3k. Although the original big win might arguably have been income, the winner has in effect capitalised that income by 'saving' it (to frank future gifts or otherwise).

I don't agree with Paul that this is trivial. Say the capitalised winning was used to gift £15k over 5 years. That's tax at stake of maybe £6k, possibly more. It's not earth shattering, but it's not what most people would consider trivial.

(I have made up some facts for illustration only. Including that the lady was retired, asset rich and income poor. If instead she churned £100k pa income, then yes, no more questions your honour.)

Thanks (1)
Replying to Tax Dragon:
RLI
By lionofludesch
06th Feb 2021 15:21

Tax Dragon wrote:

I'm struggling to believe that premium bond winnings were enough to cover regular gifts of £3000 pa.

So would I be. However, that's not what was said.

The old biddy gives away £3000. She also gives away her premium bond winnings.

Thanks (0)
Replying to lionofludesch:
avatar
By Hugo Fair
06th Feb 2021 15:48

Indeed ... but the key phrase in TaxDragon's reply is the reference to "capitalised winnings". And this is why I was banging on about the 'surplus' decision being a month-by-month check (at least in the eyes of HMRC).

For instance:
a) Winnings are single lump sum of £3000 in 12th month, but gifts of £250 are made regularly each month throughout the year ... the first 11 of the gifts stand to be rejected by HMRC (if her income/expenditure was otherwise in balance); or
b) Winnings are regular £250/mth, but gift of £3000 is made in 12th month ... £2750 of the gift stands to be rejected by HMRC (because it is not covered by surplus income from the month in which gift was made).

EDIT: I should stress that I don't believe HMRC are correct in this attitude, but I've encountered it many times. Rather than demanding a black-and-white resolution, I've usually found direct negotiation (mainly giving them more info than they asked for and applying unremitting pressure to bring things to a conclusion) means that the idiocy gets lost in the process!

Thanks (1)
Replying to Hugo Fair:
RLI
By lionofludesch
06th Feb 2021 16:46

Hugo Fair wrote:

For instance:
a) Winnings are single lump sum of £3000 in 12th month, but gifts of £250 are made regularly each month throughout the year ... the first 11 of the gifts stand to be rejected by HMRC (if her income/expenditure was otherwise in balance); or
b) Winnings are regular £250/mth, but gift of £3000 is made in 12th month ... £2750 of the gift stands to be rejected by HMRC (because it is not covered by surplus income from the month in which gift was made).

I believe it's an error to link "£3000" and "winnings". Far more likely that the total winnings in any one year - even on a maximum holding - would be well below £1000. We're probably in who cares? territory.

https://www.nsandi.com/get-to-know-us/monthly-prize-allocation#

Sure - she could get lucky, but there are only 169 prizes above £1000. If she wins a million, yes, she'd be wise to step away from her usual plan and hold back a wedge for any potential IHT.

Thanks (0)
Replying to lionofludesch:
avatar
By Hugo Fair
06th Feb 2021 16:59

Agree it's an error to link "£3000" and "winnings" ... but the error is in the OP where it says "1/3 to each of her 3 children, to a maximum of £1000 each".

For what it's worth (and without wishing either to brag or to tempt fate), my PB prizes almost never exceed the £25 per win ... but average a total in excess of £2k each year, which may not be a magnificent return but keeps me in hope of exceeding the £3k sometime soon!

Thanks (1)
Replying to Hugo Fair:
RLI
By lionofludesch
06th Feb 2021 17:09

Hugo Fair wrote:

Agree it's an error to link "£3000" and "winnings" ... but the error is in the OP where it says "1/3 to each of her 3 children, to a maximum of £1000 each".

For what it's worth (and without wishing either to brag or to tempt fate), my PB prizes almost never exceed the £25 per win ... but average a total in excess of £2k each year, which may not be a magnificent return but keeps me in hope of exceeding the £3k sometime soon!

Points taken.

But it wouldn't occur to me to stick these down as gifts within 7 years of death. They're too small, they're almost certainly out of surplus income (though we've no figures to decide whether this is the case) and the chances of HMRC challenging them are slim to zero.

Thanks (0)
Replying to lionofludesch:
avatar
By Tax Dragon
06th Feb 2021 18:35

We have no figures, no. So you and Paul generalise, while Hugo and I try to discuss the principles.

IIRC (it's not something I fill in every day), the IHT form asks for details of gifts in respect of which the exemption is believed to apply. So I'm not sure not showing it is an option. In fact, I'm pretty sure it's not.

Thanks (0)
Replying to Tax Dragon:
avatar
By Tax Dragon
06th Feb 2021 18:38

And don't forget this lady was actually gifting up to £6,000 pa. I'm not seeing that as trivial.

Thanks (0)
Replying to Tax Dragon:
RLI
By lionofludesch
07th Feb 2021 06:52

Well, I might change my stance if we had more facts from Bobz. 21 comments in and we've had nothing but the OP.

Thanks (0)
Replying to lionofludesch:
avatar
By Tax Dragon
07th Feb 2021 07:18

Then my (and maybe Hugo's) work is done. (I accept that Paul won't countenance that case-specific facts might point to a conclusion other than that which he reached based on his general observations. FWIW, I don't dispute the truth of many of his observations, just their relevance to any particular OP - including the one before us.)

Thanks (0)
Replying to Tax Dragon:
avatar
By Paul Crowley
06th Feb 2021 15:30

As i read it
£1000 each to 3 people
It would need a big win held over and no wins in the year to have any impact
Once a year creates the pattern
But as we both know NO PATTERN NEEDED
a single gift can be gift out of income

Assuming all other allowances used up

Add all other income ( NO INFORMATION ON INCOME ) spent?

If I save up five years to buy a cruise that cruise is not from this year's income.
And if it is, then all gifts made in the years I saved up are gifts out of income to the extend of my savings

I stand by my comments, despite inadequate information provided
REASON
If IHT is considered an issue then there is a lot of money
Money provides income
£3,000 a year
Trivial

Thanks (0)
Replying to Paul Crowley:
avatar
By Hugo Fair
06th Feb 2021 16:10

Just being pedantic (apparently my middle name) but ... "If IHT is considered an issue then there is a lot of money. Money provides income" is an assertion that may often be true, but certainly not always.

I know plenty of people (not clients) who are living off not much more than the State Pension, and yet own the house they live in (purchased in early '70s for £10+k but now theoretically worth between 200-300 more than that). They tend to live frugally (by choice as well as necessity), so try to give cash gifts whenever they can to the younger generation.
'Asset rich/cash poor' is a label they wear with pride ... without any inkling of the IHT that will follow their demise!

Thanks (1)
Replying to Hugo Fair:
avatar
By Tax Dragon
06th Feb 2021 16:17

That's not pedantry. It's reality.

But while we're generalising, my experience is closer to yours than Paul's. (If this is headed towards the standard method of resolution: an Aweb vote.)

Thanks (0)
Replying to Hugo Fair:
avatar
By Paul Crowley
06th Feb 2021 19:51

Usually the house being lived in gets relief
IHT is usually more problematic with spare let properties or investments.
But who knows
Maybe it is over limits

Thanks (0)
Replying to Paul Crowley:
avatar
By Tax Dragon
06th Feb 2021 16:13

You stand by your speculation you mean. If there was so much income, the OP wouldn't be worried about a few £100 premium bond winnings. Sounds to me much more likely that the relative had large assets and low income, as I said. (And I stand by what I said too. Which, btw, conceded your triviality point if it was correct. Which correctness you choose to assume; I don't.)

Thanks (0)
Replying to Tax Dragon:
RLI
By lionofludesch
06th Feb 2021 16:38

Just to keep our feet on the ground, 2.897,916 of the 2,960,195 prizes are £25 apiece.

Premium Bonds have gone downhill a bit in the last few years.

Thanks (0)
Replying to lionofludesch:
avatar
By Tax Dragon
06th Feb 2021 16:41

Again, read my first post. I haven't said otherwise. (In fact I made the same point.)

Thanks (0)
Replying to Tax Dragon:
RLI
By lionofludesch
06th Feb 2021 16:57

Yeah - I'm agreeing with you.

Just adding context with the numbers accountants love.

Thanks (0)
Replying to lionofludesch:
By Paul D Utherone
08th Feb 2021 12:38

Having been tracking this for a while, general run of the mill (£25-£100/mth) winnings on max over the last 5 years have averaged between £500 & £700 pa - best year £900 / worst £400

Thanks (0)
avatar
By Tax Dragon
06th Feb 2021 16:23

OP: one technical point. You say the relative gifted the winnings. Gifts aren't identified thus in the legislation. You look at her income and gifts in the round (Hugo implied that, but you might have missed the implication).

Thanks (0)
avatar
By Bobz
08th Feb 2021 12:19

Thanks everyone for your replies!

The relative had a taxable income of around £50k each year, plus interest from tax-free ISAs etc. Say total income was £55k each year on average. Premium Bond wins were usually over £2k each year.
She tended to give away her 'surplus' income to her children and grandchildren - £400 here, £750 there.

Her living expenses were around £30k each year, up until the last 2 years of her life when she needed more costly care (and the gifts were much smaller then - not much more that the Premium Bond wins over each year)

Does all money given as gifts (maybe just gifts of £250 or more?) need to be shown on the IHT403 form? I'm not clear on what actually needs to be declared for the past 7 years, except for allowable wedding gifts for 2 grandchildren, and £3k each tax year?

Thanks (0)
Replying to Bobz:
RLI
By lionofludesch
08th Feb 2021 12:44

Bobz wrote:

Thanks everyone for your replies!

The relative had a taxable income of around £50k each year, plus interest from tax-free ISAs etc. Say total income was £55k each year on average. Premium Bond wins were usually over £2k each year.
She tended to give away her 'surplus' income to her children and grandchildren - £400 here, £750 there.

Her living expenses were around £30k each year, up until the last 2 years of her life when she needed more costly care (and the gifts were much smaller then - not much more that the Premium Bond wins over each year)

Does all money given as gifts (maybe just gifts of £250 or more?) need to be shown on the IHT403 form? I'm not clear on what actually needs to be declared for the past 7 years, except for allowable wedding gifts for 2 grandchildren, and £3k each tax year?

Jaysus !! She's been very lucky with the Premium Bonds.

Thanks (0)
Replying to Bobz:
avatar
By Tax Dragon
08th Feb 2021 12:58

Bobz wrote:

Does all money given as gifts... need to be shown on the IHT403 form?

Yeah the form is to provide details of transfers of value, whether or not tax arises as a result thereof. (Transfers of value means things, such as gifts, that reduce the value of a person's estate - their assets. It's wider than gifts, but let's focus on the gifts.) A gift can be exempt - it should still be shown, it's a ToV.

IIRC, the £250 exemption is per recipient per tax year. It's unlikely to be relevant. (Ooh, I sound like Paul!) As total annual gifts exceeded £3,000, the whole amount is (i.e. all the gifts are) supposed to go on the form.

Thanks (1)