With careful planning, you could cut any future inheritance tax bill by at least £25,000, while claiming valuable tax relief that can secure a much-loved child or grandchild’s future. This gives you a double tax benefit and could save your family tens of thousands of pounds in total, says Mark Devlin, tax expert at M&G Wealth. It could even help build a staggering £672,000 pension pot.
That allowance was set way back in 2009, and as we reported yesterday, it would be more than £150,000 higher if it had risen by inflation.
It means more ordinary middle-income families will have to pay the punitive 40 percent IHT rate on their savings.
Yet taking advantage of an often overlooked tax benefit can both slash your IHT exposure and build wealth for younger family members, Devlin says.
When you invest money in a pension, you can claim tax relief on your contributions. This is set an either 20, 40 or 45 percent, and is a great way of cutting your income tax bill, while building wealth for your retirement.
Many people do not realise that since 2001, it has been possible to claim 20 percent tax relief on behalf of someone who isn’t actually working and earning an income.
If you invest the maximum £3,600 a year into a simple personal pension on their behalf, this only costs you £2,880.
HM Revenue & Customs will automatically top up the remaining £720.
Some people take advantage of this to pump money into a pension on behalf of a non-working spouse or partner, Devlin said. “But it can also be used to build a future pension for children and grandchildren.”
Someone who took out a personal pension on behalf of a newborn child in 2001, and invested the maximum £3,600 a year, would have paid in £59,976 after basic rate tax relief by now (which was 22 percent for the first seven years).
Parents and grandparents probably won’t be around to see them reap the benefit, but will have a double satisfaction of cutting their inheritance tax liability as well.
Those pension contributions totalling £59,976 will have fallen out of their estate for IHT purposes.
Assuming all of that was subject to the punitive 40 percent IHT charge, they would have saved £23,990 in tax.
Parents and grandparents with money to spare could repeat the trick for other children, making even bigger tax savings.
Devlin said this is hugely rewarding all round. “It’s a great way to leave a long-lasting legacy by helping to secure a child or grandchild’s financial future, while reducing your IHT liability.”
It also gives you the satisfaction of beating Sunak’s endless tax raids. With some of your money at least.