IHT Planning and Pensions

Until the 2024 Budget, the best available Inheritance Tax plan was the personal pension.
This is because there is tax relief on contributions, the fund builds up in a tax advantaged
environment and there is no IHT on death.

However, Rachel Reeves in her Budget decided that this was too generous and perhaps it
was. Consequently, from 6th April 2027 any unused pension pot will be subject to IHT unless
it is left to a spouse or civil partner. Unfortunately, this is not enough for the Chancellor who
then went on to declare that when the funds are drawn that they shall be subject to income
tax in the hands of the beneficiary. This is a cruel form of double taxation.
So, what can you do about it?

There are two elements to a pension, the tax-free lump sum and the taxable income.
For those able to afford to do so, the lump sum could be drawn down and gifted away. For
this to be effective for IHT, the donor must survive seven years.

For those who wish to retain access to their money, or who feel that seven years is too
optimistic, investing the lump sum in a qualifying Business Relief investment would be IHT
free once held for two years. The investment can still be accessed and used for whatever
purpose.

A regular withdrawal of the tax-free fund is another option. Assuming that this is surplus to
requirements, these funds could be gifted to the family or into a trust for their benefit and it is
immediately outside the estate for IHT purposes. If the gifts are regular and last for c. four
years plus, then they are classed as gifts out of surplus income, a relatively little-known
exemption.

The same rules would apply to the taxable income. The question is whether it is worth
paying the income tax to avoid the IHT and income tax suffered by the beneficiaries. It may
well be.

Clearly, this is an area where advice is needed to avoid pitfalls and action effectively.

Please feel free to contact us via our contact page Contact Rutherford Hughes Ltd |
Financial Advisers | Newcastle Upon Tyne or calling 0191 229 9600

Please note that the FCA does not regulate tax advice. The value of investments may rise and fall, and you may not get back
as much as you invested.