How Your SIPP Could Slash Inheritance Tax

How Your SIPP Could Slash Inheritance Tax
Kura Huraa Maldives by Julian Cohen. Why?

As the Bank Of Mum And Dad hits the headlines, your SIPP provides a legal and effective way of passing on wealth in an Inheritance Tax efficient manner

There’s No Need To Hide Your Money In Panama To Reduce Your Inheritance Tax Bill

What’s The Bank Of Mum And Dad Got To Do With Inheritance Tax?

Having just agreed to become a funder at the Bank Of Mum And Dad for my daughter’s first property purchase, according to Legal & General, it seems the Bank Of Mum And Dad will help finance 25 per cent of UK mortgage transactions this year.

Parents are set to lend their children £5 billion to help them onto the property ladder. If the lending power of these parents is combined, it would be a top 10 mortgage provider.

The research estimates that parents are likely to provide deposits for more than 300,000 mortgages. The homes purchased could be worth £77 billion and the average contribution is expected to be £17,500, or 7 per cent of the average purchase price.

If you’re a parent or a grandparent, the report is well worth a read.  Click the image to download it.

Providing I survive seven years, my Bank Of Mum And Dad gift is unlikely to be subject to Inheritance Tax.  It’s reassuring to know the taxman won’t be able to get his hands on up to 40 per cent of it.

inheritance tax

"The Bank Of Mum And Dad Is Run By Total Bxxtards"

Occasionally, the Bank Of Mum And Dad seems to operate like other banks, as you can see in this article entitled Bank Of Mum And Dad ‘Fxxkers Just Like The Rest Of Them’.

Inheritance Tax Receipts Are On The Rise

With the seemingly unstinting rise in property prices in the UK, Inheritance Tax will affect more and more families as time goes by.  Although the Government has recently made some changes that’ll take effect in the coming years to reduce the amount of Inheritance Tax charged on property transfers, a recent study concluded our children may well be poorer in retirement than us.  This is due to the fact that it’s increasingly more difficult for them to get onto the property ladder in the first place, and the virtual extinction of high quality final salary pension schemes.

It’s fair to say that those families who might be hit by Inheritance Tax are relatively affluent.  And as “we’re all in it together”, it’s not unreasonable for there to be some Inheritance Tax charged when wealth is passed from one generation to the next. 

However, Inheritance Tax is reckoned to be rather unfair, in that the net inheritance received by your children could be taxed again when it passes to your grandchildren, and yet again when it passes onto their children.  Generational Inheritance Tax raises billions each year for the UK Government.

Here’s a short video on the subject of generational Inheritance Tax.

There’s no doubt life for our children and grandchildren is going to be more tricky from a financial perspective than it has been for generations before them.  Gone are the days when children reach 18 and fly the nest without resorting to occasional and more frequent monetary handouts from their older relatives.

Using Your SIPP To Save Inheritance Tax

It struck me recently that a SIPP is a very effective Inheritance Tax planning vehicle through which wealth could be passed on to future generations.  There are a number of Inheritance Tax exemptions and reliefs that could be applied to your contributions, nicely listed by HMRC in its section on Inheritance Tax.

By funding a SIPP for your children's or grandchildren’s benefit, you could significantly reduced the amount of Inheritance Tax payable. 

Your contributions will reduce the value of your estate, which could save up to 40 per cent Inheritance Tax at a stroke.  The money invested within a tax free SIPP wrapper isn’t subject to Inheritance Tax, because it’s outside of your estate as well as your children’s and grandchildren’s. 

Even if you’re not working, you could be eligible to make a contribution of up to £2,880 net of basic rate tax, which will effectively be boosted by 25 per cent when tax relief of £720 is added to your SIPP with the compliments of HMRC.

As a result, not only does a SIPP provide an effective Inheritance Tax shelter, its value is boosted further by tax relief (whether you pay Income Tax or not).  In addition, the money you’ve invested within your SIPP wrapper is treated in a tax privileged way too, enabling its value to grow more quickly compared to investing your money is similar assets that aren’t sheltered within your SIPP.

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Over time, charges can wipe out a huge part of your fund.  We like AJ Bell because there are no set-up costs.  If you hold passive funds, which is our preference, or shares, investment trusts, EFTs, gilts or bonds, you pay one small fixed fee no matter how large your fund.  And when you come to draw your benefits either as occasional drawdown or UFPLS payments, there's a small charge for the whole year no matter how many times you access your money (many SIPP and SSAS providers charge more than this for each payment).

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