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."
Like a self-select ISA but for pensions, self-invested personal pension is a registered pension plan that gives you a flexible and tax-efficient method of preparing for your retirement. It gives you all sorts of options on how you put money in, how you invest it and how it’s paid out and offers a greater number of investment opportunities than if the fund was managed by a pension company. SIPPs are very flexible and allow investments such as quoted and unquoted shares, investment funds, cash deposits, commercial property and intangible property (i.e. copyrights, royalties, patents or carbon offsets). Not permitted are loans to members or people or companies connected to the SIPP holder, tangible moveable property (with the exception of tradable gold) and residential property.
The tax levied on the total value of your estate after you die. IHT has to be paid by the beneficiaries of your estate before they can receive any of the money from it. The money can’t be taken from the value of the estate _– it has to be paid before any money can be released. There is an IHT threshold – known as the “nil-rate band” – below which no tax is levied (£325,000 in 2011/12). Any amount above the nil-rate band is subject to tax at 40%. If your estate totals £600,000, there is no tax on the first £325,000; however your estate will pay 40% tax on the remaining £275,000, a total of £110,000. Prudent tax planning can reduce your IHT liability, so always consult a specialist solicitor.
Everything you own: all your assets (property, cars, investments, savings, insurance payouts, artwork, furniture etc) minus any liabilities (debts, current bills, payments still owed on assets like cars and houses, credit card balances and other outstanding loans). When you’re alive this is called your wealth; when you’re dead, it becomes your estate.