MARTIN Lewis has revealed how a huge tax loophole could save your loved one’s £1,000s when you die.
The founder of MoneySavingExpert.com has explained how one key investment can be used as a powerful weapon in the fight against inheritance tax (IHT).
In the latest episode of The Martin Lewis Podcast, he discussed an effective method for transferring wealth to your spouse or children after your death without incurring any inheritance tax.
Charlotte Jackson, head of guidance at the Money and Pensions Service, further explained how pensions can be utilised to “pass on wealth” to your spouse or children.
She highlighted that pensions are increasingly being seen as a vehicle for transferring wealth due to the tax relief they offer.
Charlotte said that many people are now choosing to continue saving into their pensions even in later years and are opting not to access these funds.
While pension pots can’t be gifted ahead of time, you can still pass on these savings to dependents without any tax liabilities, such as inheritance tax or capital gains tax, provided the funds have not been touched.
She said: “What we’re seeing more of now is people saving even in later years and not accessing that pot because it comes with tax relief, and you can pass that on.
“And that’s a really big consideration.
“You don’t pay tax on it at all, so if you don’t access that pension pot and you were then to die, that pension pot gets passed to your spouse or your children.
“So, if you’ve never touched your pension, it can be passed down without inheritance tax or capital gains tax.”
We’ve explained exactly how this works in detail.
Any assets left when you die, like cash or savings, will be part of your estate for inheritance tax purposes – even if they were originally part of your pension pot.
In most cases, any pensions you have can be passed outside your estate, so they won’t be subject to inheritance tax.
However, the pension scheme administrator would need to keep the right to decide who to pay the benefits to.
Generally, most pensions are set up under a discretionary trust.
This means the trustees or providers have the right to choose who receives anything from your pension after you die.
You can usually complete an “expression of wish form” to tell the scheme administrator who you’d like to receive your death benefits.
They’ll usually follow your wishes, but they don’t have to.
Doing this also means the value of the death benefits usually won’t be counted as part of your estate, so won’t be subject to inheritance tax.
If you die before the age of 75, the person(s) who inherit your pension pot can draw on the money as they wish, without paying any income tax either.
However, if you are 75 or over when you die, a beneficiary of your pension pot will have to pay income tax on any withdrawals at their marginal rate (i.e. the highest rate of income tax that they pay).
INHERITANCE tax is a tax on the estate (the property, money and possessions) of someone who's died.
There’s normally no Inheritance Tax to pay if either:
Funds from your estate are used to pay inheritance tax to HMRC.
This is done by the person dealing with the estate (called the “executor”, if there’s a will).
There’s normally no Inheritance Tax to pay if the value of your estate is below the £325,000 threshold.
You can also avoid paying the tax if you leave everything above the threshold to your spouse, civil partner, a charity or a community amateur sports club.
If your estate’s value is below the £325,000 limit, you will still need to report it to HMRC.
If you give away your home to your children – including adopted, foster or stepchildren – or grandchildren when you die, your inheritance tax threshold can increase to £500,000.
This is called the “main residence” band.
If you’re married or in a civil partnership and your estate is worth less than the upper limit, any unused threshold can be added to your partner’s when you die.
This means their threshold can be as much as £1million.
The standard inheritance tax rate is 40% – but it is only charged on the part of your estate that’s above the threshold.
For example, if your estate is worth £500,000 and your tax-free threshold is £325,000.
The inheritance tax charged will be 40% of £175,000 (£500,000 minus £325,000).
There are plenty of legal ways to reduce inheritance tax.
If you leave 10% or more of the net value of your estate to charity in your will, there is a reduced rate of 36% on some assets.
You can also give gifts while you’re alive, however these will be taxed if more than £325,000 is handed out in the seven years before your death.
There’s usually no inheritance tax to pay on small gifts you make out of your normal income, such as Christmas or birthday presents – known as ‘exempted gifts’.
There’s also no inheritance tax to pay on gifts between spouses or civil partners.
You can give them as much as you like during your lifetime, as long as they live in the UK permanently.
Putting assets into a trust for your heirs and paying into a pension instead of a savings account will also help reduce inheritance tax.
There are other reliefs, too, such as business relief and agricultural relief, where some assets can be passed on tax-free.
WE round-up the main types of pension and how they differ:
