SIPP and IHT

Briskly

I am still baffled by the new IHT on pensions that will come in next year.

I have inherited a SIPP, which allows tax free withdrawals. I have written in my letter of wishes that this passes on to someone. It seems if I die before 75 this will also be tax free. But, as of next year there will be 40% IHT on the pension pot. I intend to leave a large sum to charity - my question is, can I earmark the entire pension to charity in my will to escape the IHT and income tax? At present it seems you can't write pensions into wills, but this must surely change next April as they have to be included for probate. How would this work? Would the charities chase up the pension trust to get their money, bypassing HMRC? If not it would seem the best option is to withdraw the pension on my deathbed….

Also, it still isn't clear if income tax is applied on the pension after or before IHT. I can see HMRC demanding 40% on the total pension in IHT and then wanting up to 40% of the total in income tax. So £100,000 is reduced to £60000 by IHT and then to £20,000 by income tax. I seem to have read some commentators saying the income tax will only be applied on the sum after IHT is deducted but can't find any documentation to confirm. It all seems a complete mess, putting loads of extra work onto executors.

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QrizB

Depending on the size of your inherited SIPP, since you can currently withdraw it tax-free could you cash it in make your gifts while you're still alive?

Albermarle

There will not be ‘40% on pension pots ‘

Any unused pension pot will be included with the rest of your estate, for IHT calculation purposes. This may or may not result in some IHT being levied on the unused pension pot. The amount will depend on the total assets of the estate, and what nil rate band you have available.

The pension will still not be included in wills after 2027. Your expression of wish with the trustees will still determine who the beneficiaries will be.

The income tax + IHT issue is apparently going to be addressed - details not fully clear yet.

You are right that it will cause some executors of larger estates more work. However unused pension pots escaping IHT, was always a loophole waiting to be closed.

Briskly

Thanks for the advice. I guess one idea is to gift it when I am on the way out!

I've done the sums and the total pension will be hit with IHT as it pushes the estate over the nil band. If it still has to be a letter of wishes, can the entire pension with full certainty be left to charity so that there is no income tax to pay on it? This would hopefully leave the rest of my estate free of income tax for the beneficiaries.

doodling

Hi,

https://forums.moneysavingexpert.com/discussion/comment/81983090#Comment_81983090

You need to give it seven years before you pass away to avoid IHT (unless to a charity).

Are you certain that your estate will be subject to IHT? You only pay IHT on the amount over your nill rate band so is the IHT tax hit really that great?

DRS1

Gifts to charity are also very beneficial from an IHT point of view. A big enough gift reduces the IHT rate on the rest of the estate. As well as the gift itself being free of IHT.

I assume giving the SIPP to charity would have the same effect as giving part of your estate but I am not sure of that. Still if it is only your SIPP which would be in IHT territory and you give it all to charity maybe that does not matter.

af1963

the total pension will be hit with IHT as it pushes the estate over the nil band

These don't mean the same thing. You could have non pension assets (excluding main residence) of £10k and pension assets of £320k. The pension pushes the whole estate over the nil band. But only £5k of the total assets will be taxed.

Also note that there are some fairly obscure tax charges that apply to money left to charities, from pensions, if there are any surviving dependents. Some info here:

https://professionalparaplanner.co.uk/technicalzone/leaving-pension-money-to-charity-could-trigger-tax-inefficiencies/

Since this is a pension that you can withdraw from without paying tax, one option to consider is taking money out of the pension as soon as the changes to the IHT regime take effect. Either all at once, or in stages to move it into ISAs to keep it tax free.

Another option to consider, assuming you're a taxpayer, and you're confident you won't need the money yourself, is to donate to charity using gift aid while you're still alive rather than waiting till you're gone. Pay an extra £1k to a charity, replace it with £1k withdrawn tax free from the inherited SIPP, and the charity can claim an extra 25% via gift aid. And you get to see it being used.

mrklaw

if you’re expecting to be over the nil rate band you should have enough of a buffer to be able to comfortably and safely give now, tax free, to a level that would keep you inside or mostly inside the IHT allowances without much risk?

Briskly

https://forums.moneysavingexpert.com/discussion/comment/81983136#Comment_81983136

https://forums.moneysavingexpert.com/discussion/comment/81983136#Comment_81983136

Yes, the IHT hit will be huge as I am single and don't have any children to give to. I intend to give at least 10% to charity to obtain the reduced 36% on the remainder and was hoping to use the pension to pay the bulk of the 10%.

Briskly

https://forums.moneysavingexpert.com/discussion/comment/81983157#Comment_81983157

Thanks for that link - it seems this is still a very grey area, which is ridiculous as we need to plan. I'd rather not withdraw the pension when IHT kicks in it as it seems a much better investment that a savings account and is tax free. I just need to be sure about the income tax situation. It seems the charities might even have to pay income tax on it!

Briskly

https://forums.moneysavingexpert.com/discussion/comment/81983160#Comment_81983160

Thanks. I can't gift now because I may have a lot of expenses soon. I'm hoping to they may not arise so I keep the buffer and then give a fair bit the charity if I can in my will. If all goes well, the reduced 36% IHT rate will apply to the remainder above the nil rate and I will have given an awful lot to charity without depriving my friends of too much of the rest. But it seems unfair if income tax is applied to the pension if I clearly designate it is all going to charity!