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Inheritance Tax meets Child Benefit Tax

Author Image The Technical Team
3 minutes read
Last updated on 6th Apr 2019

Overview

How inheritance tax planning can also help lower tax on a family basis and help with retirement planning.

Key points

  • The high income child benefit tax charge affects people who may not have the disposable income to do anything about it but who may have parents who could help
  • Contributions paid into someone else's pension are treated as either exempt or potentially exempt transfers for IHT purposes.
  • A contribution paid by a grandparent for an adult child caught in the high income child benefit tax charge trap can combine tax planning on a family basis and retirement planning.

The facts

There is a 1% tax charge on the child benefit received for each £100 of Adjusted Net Income over £50,000. At £60,000 plus, the tax charge is 100%, in effect removing all child benefit.

The gross value of contributions by the member or a third party on their behalf to personal pension schemes are deducted when calculating Adjusted Net Income.

Contributions paid into someone else's pension are treated as either exempt or potentially exempt transfers for IHT purposes. For income tax purposes they are treated as if they were made by the member of the pension scheme not the payer.

The planning

Identify someone in the child benefit tax trap:

  1. There is a member of household receiving child benefit and
  2. One member of the household has Adjusted Net Income in excess of £50,000 (even if they are not the recipient of the child benefit)

Identify the amount of Adjusted Net Income in excess of £50,000.

Make a pension contribution of 80% of the excess either as a single or regular contribution in the tax years the tax trap applies.

The case studies

Both case studies use the rates, bands and allowances for the current tax year and exclude National Insurance.

Scottish taxpayers will pay the Scottish rate of income tax (SRIT) on non-savings and non-dividend (NSND) income. NSND income includes employment income, profits from self-employment (including sole trades and partnerships), rental profits, and pension income (including the state pension). Similarly, from 6 April 2019 Welsh Taxpayers will pay the Welsh Rate of Income Tax (CRIT (C for Cymru)) on NSND income.

Other tax and deductions such as Corporation Tax, dividends, savings income and National Insurance Contributions etc. will remain based on UK rules. This could mean the amount of income tax relief which can be claimed on pension contributions by Scottish and UK tax payers may not be the same. For more info on SRIT and how this works in practice, please visit our facts page. For more info on CRIT and how this works in practice, please visit our facts page.

Case study 1

Grandparents

Parents

Facts
Estate in excess of Nil Rate Band
Want to do IHT planning

Facts
Adjusted Net Income £60,000
Child Benefit for 3 children
No pension provision

Problem
IHT liability

Problem
Limited disposable income
Retirement funding shortfall
Child benefit tax charge £2,501

Bank Balance after income tax and child benefit tax charge -
£10,000 - £4,000 - £2,501 = £3,499

Solution
Write cheque for £8,000
Exempt or Potentially Exempt Transfer

Solution
Receives £8,000 net pension contribution

Impact
IHT saving
£8,000 x 40%
= £3,200

Impact
Pensions
Grandparents paid £8,000
Basic Rate Tax Relief £2,000
Amount in Pension £10,000

Bank Balance
Previous £3,499
Child Benefit Tax saving £2,501
Higher Rate Relief £2,000
£8,000

Benefit
Lowered IHT liability
Passed on more wealth

Benefit
Pension funding started £10,000 pot
Additional Income £4,501
Money for today and tomorrow.

Family Tax Saving

Inheritance Tax
Child Benefit
Relief at Source
Higher Rate Relief
Total

£3,200
£2,501
£2,000
£2,000
£9,701

121% relief from an £8,000 cheque!

Case study 2

Grandparents

Parents

Facts
Estate in excess of Nil Rate Band
Want to do IHT planning

Facts
Adjusted Net Income £53,750
Child Benefit for 3 children
No pension provision

Problem
IHT liability

Problem
Limited disposable income
Retirement funding shortfall
Child benefit tax charge £925

Bank Balance after income tax and child benefit tax charge -
£3,750 - £1,500 - £925 = £1,325

Solution
Write cheque for £3,000
(£250 per month direct debit)

Annual Exemption used

Solution
Receives £3,000 net pension contribution

Impact
IHT saving
£3,000 x 40%
= £1,200

Impact
Pensions
Grandparents paid £3,000
Basic Rate Tax Relief £750
Amount in Pension £3,750

Bank Balance
Previous £1,325
Child Benefit Tax saving £925
Higher Rate Relief £750
£3,000

Benefit
Lowered IHT liability
Passed on more wealth

Benefit
Pension funding started £3,750 pot
Additional Income £1,675
Money for today and tomorrow.

Family Tax Saving

Inheritance Tax
Child Benefit
Relief at Source
Higher Rate Relief
Total

£1,200
£925
£750
£750
£3,625

121% relief from a £3,000 cheque!

Labelled Under:
Inheritance Tax

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