Tax Bite – Spousal bypass trust can mitigate IHT

This week we are looking at inheritance tax (IHT) strategies using a pension scheme.

A number of business owners and high-net-worth individuals have built pension pots over the years. However, when they reach retirement, due to their business interests and other investments it may be that they do not require pension income from their pension arrangements. At this time in their life, a pension plan may offer more advantageous IHT benefits than income benefits.

1. Pre-age 75 you are able to secure 100% Inheritance Tax relief on the value of your pension plan before any benefits have been taken from it. In fact there will be no taxes payable.

2. The lump sum would usually be paid to the spouse however this can inflate their estate and just effectively defer the eventual 40% IHT take.

3. However most clients may not want to directly pass this money to their children as their spouse may still need access.

4. A Trust can be established which is for the benefit of the children however this allows loans to the spouse which will be called in on second death thereby offsetting against the estate at that time.

This type of planning is a well-kept secret and is not that well publicised as only a number of specialist pension companies have taken this on board as a tax planning exercise. The Trust can be set up via a pension advisory company with a specialist spousal bypass trust with the legal wording checked by pension lawyers.

 

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