With inheritance tax receipts on the rise, Britons are urged to consider a little known fact which could help them avoid losing thousands to the tax man.
Inheritance tax receipts increased to £7.5billion from March 2023 to April 2024, the highest value ever recorded, HMRC figures show.
However, less than four per cent of estates were subject to the levy, according to the most recent data, as Britons can benefit from tax-free allowances.
While gift allowances are often used to help reduce an inheritance tax bill, Britons could also consider pumping more money into their pension as it can be passed down to family members tax-free.
Mike Ambery, retirement savings director at Standard Life, part of Phoenix Group said told GB News: “It’s a little-known fact that most pensions sit outside of your estate, and so they’re not liable for inheritance tax (IHT).
“Because of this, people have the ability to save significant sums and benefit from largely tax free growth of their savings within a pension and then pass it on without paying IHT.
Inherited funds that remain invested will continue to benefit from tax-free growth until the beneficiary withdraws them
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“Because of this, people have the ability to save significant sums and benefit from largely tax free growth of their savings within a pension and then pass it on without paying IHT.
“The removal of the pension lifetime allowance in April adds to the potential tax efficiency of this method of passing wealth to loved ones.
“If you die before the age of 75, your pension can be paid to a beneficiary tax-free. If you die after 75 they can be paid at your beneficiary’s marginal rate.
“If you’re planning to use your pension to transfer wealth when you die, make sure to keep your beneficiaries updated as you can’t specify who you want to receive your pension in your will.
“It’s important to check the rules of your pension scheme and seek advice if possible so you can make the most appropriate choice for your circumstances.”
The potential advantages of being able to pass on pension funds include:
1 Inherited funds that remain invested will continue to benefit from tax-free growth until the beneficiary withdraws them.
The pot can even be returned to beneficiaries (which does not impinge on their ability to fund a pension) or left for future generations.
2 This effective ‘IHT exemption’ should be considered by anyone who will be able to fund their retirement by other means. Of course, the tax savings will depend on the income levels of beneficiaries.
3 If an individual has no dependants, it is possible to nominate a charity to receive any remaining pension funds tax-free on death.
A common misconception is that inheritance tax is only for the wealthy, however rising property prices and a 20-year freeze on the inheritance tax threshold are pulling more families into the net and causing bills to grow.
Currently sitting at four percent, the proportion of deaths resulting in inheritance tax is estimated to grow to more than seven per cent by 2032/33.
Inheritance tax is usually charged at a rate of 40 per cent on the portion of the estate over a £325,000 threshold.
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This increases to £500,000 if it includes a family home worth at least £175,000 which is passed on to children, grandchildren or another direct lineal descendant.
Married couples and civil partners can increase this threshold to £1million as an unused threshold can be transferred to the surviving spouse or civil partner.
There is normally no need to pay tax if:
- The value of the estate is below the £325,000 threshold (this is known as the nil rate band)
- They’re married or in a civil partnership and leave everything above the threshold to the spouse/partner
- They leave everything above the threshold to an exempt beneficiary, like a charity, community club, or political party.
