My father, 97, pays into his granddaughter's pension - will there be inheritance tax to pay?

7 April 2020


I have power of attorney for my father, who is 97.  Luckily, he is still in good health and has a good sum of money behind him.  Currently, his estate is just below the £650,000 inheritance tax (IHT) threshold — this includes my mother’s IHT allowance as she died in 2001 and it was unused. He does not own property any more. 

I am aware of the gift allowances he can use to give free of IHT, which he uses fully.  However, I am unsure about how one of them may be interpreted. 

We set up a stakeholder pension several years ago for my 27-year-old daughter, who is a veterinary student. Over the past two years, my father has contributed £2,280 annually to her pension, with the tax relief taking it up to £3,600. Will this sum be considered as if it were the £3,000 IHT exempt gift, or is it interpreted differently because he pays it directly into her stakeholder pension?

SS/via email


The current IHT nil-rate band is £325,000. This is the amount that somebody’s estate can be worth, when they die, before it becomes liable to pay inheritance tax. As you allude to, there are special rules for UK-domiciled married couples and registered civil partners. On first death, the survivor can claim up to 100% of their partner’s unused nil-rate band, as well as their own entitlement, providing an allowance of up to £650,000.

You mention that your father does not own property anymore. However, he may still be able to benefit from the residence nil-rate band if he owned a property from 8 July 2015 and leaves assets of equivalent value to direct descendants.  

The residence nil-rate band was introduced in phases starting in April 2017 at a rate of £100,000, rising to £125,000 from April 2018, £150,000 from April 2019, and it will be £175,000 from April 2020. Similar to the standard nil-rate band, any remaining allowance can be transferred to a spouse or civil partner on death.

Any gifts that your father makes during his lifetime will be either exempt from IHT, potentially exempt or chargeable.

You refer to the £3,000 annual exemption. Individuals can gift up to £3,000 a year and it is immediately exempt from inheritance tax, (or £6,000 if they did not make a gift of this kind in the previous tax year). The gift that your father makes to your daughter’s pension can qualify as part of this £3,000 exemption providing he isn’t also making other gifts elsewhere which mean he exceeds the allowance.

Alternatively, the gift your father makes into your daughter’s pension could be treated as using the normal expenditure out of income exemption, where gifts intended to be made on a regular basis can be ignored for inheritance tax, regardless of their size. 

To qualify, any gifts must be made out of your father’s normal expenditure, be made out of income, and after gifting it he must be left with sufficient income to maintain his usual standard of living. The most common sources of income to determine eligibility for this are employment and self-employment, rents from property, pensions, interest and dividends.

Patrick Connolly is a certified financial planner at Chase de Vere.

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