Reduce your IHT bill by giving to your children

Contributing to a child or grandchild’s pension can help reduce your inheritance tax (IHT) bill, according to Alliance Trust Savings.

The self-invested personal pension provider claims that putting money into a pension for a child or grandchild - £2,880 can be donated tax-free into a pension each tax year – is a good way to provide financial security for youngsters as well as reduce one’s own IHT liability.

Currently an individual can pass on an estate worth up to £325,000 without any IHT applying. But if they are the surviving spouse then they inherit their partner's allowance, which means they can can pass on £650,000 worth of assets.

If an estate – including any assets held in trust and gifts made within seven years of death – is more than the threshold, IHT is due at 40% on the amount over the current £325,000 limit.

Alliance Trust Savings says many people do not realise that they could mitigate their IHT liability by making gifts to a child’s pension.

Pension contributions are also boosted by tax relief. A contribution of £2,880 to a child or grandchild’s pension (including Sipps) will see HMRC top this up to £3,600.

As well as the maximum annual amount of £2,880, additional payments made to a child’s pension will be treated as potentially exempt transfers and will therefore be exempt from IHT if the donor survives for seven years. 

Steve Latto, head of pensions at Alliance Trust Savings, comments: "People are increasingly looking at ways to secure the financial future of their children or grandchildren while at the same time trying to minimise the impact of IHT on their estate.

"Individuals may be unaware that both objectives can be met by making contributions into a child SIPP. This also has the added benefit that contributions will be further boosted by tax relief."

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