2 September 2011 by

Pensions can save your family +£100,000s

Inheritance Tax (‘IHT’) saving usually involves giving away your assets and, as such, is something that many put off until later in life, when they have paid off the mortgage and the kids are as self-sufficient as they are ever likely to be. However, it’s possible for many to structure their affairs so that their children receive tens or hundreds of thousands of pounds extra without the parents depriving themselves of the benefit of the assets they’ve worked hard to acquire.

If you have life insurance, a pension fund or death-in-service benefits, it’s likely that a lump sum will be payable on your death, often to your spouse or civil partner, children or other nominated relatives. This lump sum is, in the vast majority of cases, free from IHT no matter how large it is. So far, so good.

However, most of the time these sums are paid out to the surviving spouse or civil partner, who is exempt from IHT anyway. That pension pot then becomes part of their estate so that when they die it will be subject to IHT. If the surviving spouse’s/civil partner’s assets exceed the current IHT allowance for couples (£650,000) then whatever remains of the pension pot, when added to the other assets of the estate, will be taxed at 40%.

This can be avoided by planning ahead and by making use of what are commonly called “pilot trusts” or “spousal by-pass trusts”. The theory behind these is relatively straightforward; if you die, your lump sum death benefits do not pass to your spouse/civil partner and children but instead are directed into a trust of which your spouse/civil partner and children are beneficiaries and, usually, your spouse/civil partner is a trustee. Therefore, your spouse/civil partner has access to the assets within the trust, but they do not belong to him or her and do not form part of their estate for IHT purposes.

Additionally, distributions to beneficiaries, though most likely to be the surviving spouse/civil partner, with an appropriately worded trust can be made as loans which will be treated as a liability against the surviving spouse’s/civil partner’s estate providing for further IHT saving.

The IHT on a £1m pension on the death of a surviving spouse or civil partner will be £400,000. With a pilot or spousal by-pass trust this could be reduced to zero.

Of course, the principle is simple but the planning itself is not, given the tax and trust laws that can thwart the unwary.

Please call or email Iain Aitken for further information on 020 7228 4713 or iainaitken@boltburdon.co.uk

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