View more on these topics

Heirs and graces

Continuing in our series on the new opportunities offered by the new defined-contribution tax regime, in this article we look at how stakeholder and personal pensions could be used in inheritance tax planning.

We all know how inheritance tax mitigation forms an important part of the financial planning cycle for many clients and, with the current nil-rate threshold at £242,000, more and more high-net-worth clients need to take action to reduce the potential IHT liability.

Until now, professional advisers – including solicitors and IFAs – have made use of a number of tools available to help in IHT planning. It is vital that a will is made and reviewed regularly to ensure that it matches the changing circumstances of the client and any legislative alterations.

In addition, clients should take advantage of exempt transfers between spouses, current annual exemptions and small gifts.

Other tools include potentially exempt transfers, gift inter-vivos policies and the appropriate use of trusts.

However, under the new regime, it is now possible to use stakeholder or personal pensions. Non-earners, including children, are eligible to contribute up to £3,600 a year to a stakeholder or personal pension. This allows relatives, such as parents, grandparents, godparents or aunts and uncles to contribute to younger family members&#39 pension arrangements.

Another option would be for a working spouse to contribute on behalf of a non-working spouse.

Stakeholder and personal pensions could be used to absorb the annual gift exemption of £3,000 per donor.

Until now, it has been relatively common for parents or grandparents to use up the annual exemption by making cash gifts to children or grandchildren.

However, now a stakeholder or personal pension can be taken out for the child with the grandparent funding the contributions. The net cost to the donor will be £2,808 and the provider will then claim the basic-rate tax from the Inland Revenue, resulting in a gross amount of £3,600. For IHT purposes, the net figure of £2,808 is taken as the sum leaving the donor&#39s estate.

It should be noted, however, that the tax relief applies to the member, not the contributor. A grandparent paying higher-rate tax cannot claim back the higher-rate relief. The annual exemption can be used each year in this way, providing a valuable savings pot for the child – and one that cannot be accessed until 50, unlike cash gifts.

Another exemption that can be used under the new regime is for contributions to be paid out of normal income. There would have to be clear evidence that the contribution was coming out of income rather than capital and that the money was being paid on a regular basis.

If the contributions do not qualify under the annual gift exemption or normal expenditure from income, then they may be considered as Pets. There is still some debate surrounding Pets and further clarification is required from the Inland Revenue.

When a stakeholder or personal pension is being taken out on behalf of a minor, the Inland Revenue has specific rules. The legal guardian of the child must take out the stakeholder or personal pension. This includes completion of the relevant application forms and taking responsib-ility for the contract until the child is 18.

The legal guardian must also sign a separate declaration stating that they understand that the contributions paid to the contract may only be returned to the member in the form of benefits payable under the rules of the personal or stakeholder pension scheme.

So a double-edged opportunity to come out of the new tax regime. Not only can grandparents help to provide for their grandchildren&#39s future but they can also reduce the IHT tax burden.


Two-thirds of IFAs see compulsion on the way

Nearly three-quarters of IFAs feel the Government could be forced to introduce some form of compulsion to pensions, according to research carried out at Royal & Sun Alliance pensions roadshows.One hundred IFAs were questioned at events in London last month, revealing that 73 per cent of advisers expect the Government will have to go down […]

Number of Guernsey based funds grows

The number of funds serviced in Guernsey has increased by 14 per cent to 894 from 783 over the 12 months to June 2001, according to research by publishers Fitzrovia International.Guernsey International Fund Managers is the largest fund administrator, administering $8.7bn of fund assets in Guernsey, with Credit Suisse & Helvetia Fund Administration second largest, […]

DWP to launch face to face advice service

The Department for Work and Pensions is set to launch a face-to-face advice service for pensioners and those planning for retirement. As part of the new Pensions Agency, advisers would offer a home visiting service. It says it will give advise on benefits and if asked about personal pensions would direct people to websites and […]

Words of advice for all networks

Having read the article on Kean Seager&#39s new empire-building venture, I would like to offer 10 commandments to him and existing networks to help them achieve their goals.1: Stop taking an unjustifiable percentage of an IFA&#39s turnover and start charging a fee (and please not both). This will prevent you needing to justify your huge […]

Powerful estate planning tools ignored or forgotten by wealthy Brits

Canada Life IHT Survey 2016 Only a quarter of wealthy Brits have sought professional estate planning advice to ensure their families don’t pay more tax than required More than a quarter don’t even have a will and just one in five have gifted money Many say they do not need these tools but families would […]


News and expert analysis straight to your inbox

Sign up


    Leave a comment


    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm