Saturday 21 December 2013

Inheritance - One SIPP at a Time

Now that's using your feet!
With the inexorable rise in property prices in the UK, Inheritance Tax (IHT) will hit more and more families in the future. At the same time, life is looking harder for the post-baby-boomers: a recent study concluded that, for the first time, our children may be poorer in retirement than us.

OK, families hit by IHT are relatively affluent and it is fair that there should be some taxation of any transfer of wealth from one generation to the next. However, most families didn't save money by accident - it was often down to hard slog. So it is natural that they would look for legal (i.e. sanctioned by Parliament) tax-effective ways of passing on as much of their accrued wealth as possible.

Just to recap on IHT:
  • The individual threshold or 'nil rate band' is £325,000 (in the tax year 2013-14). Anything above that should pay a tax of 40% (or 36% if the estate qualifies for a reduced rate as a result of a charitable donation)
  • Since October 2007, married couples (and registered civil partners) can effectively increase the threshold on their estate when the second partner dies - to as much as £650,000 (in 2013-14). Their executors or personal representatives must transfer the first spouse's unused Inheritance Tax threshold or 'nil rate band' to the second spouse when they die.
  • There are some important exemptions from IHT:
    • Spouse (or civil partner) exemption. Your estate usually doesn't owe Inheritance Tax on anything you leave to a spouse who has their permanent home in the UK - nor on gifts you make to them in your lifetime - even if the amount is over the threshold.
    • Potentially exempt transfers. If you survive for seven years after making a gift to someone, the gift is generally exempt from Inheritance Tax, no matter what the value.
    • Annual exemption. You can give up to £3,000 away each year, either as a single gift or as several gifts adding up to that amount - you can also use your unused allowance from the previous year but you use the current year's allowance first.
    • Small gift exemption. You can make small gifts of up to £250 to as many individuals as you like tax-free.
    • Wedding (and civil partnership) gifts. Gifts to someone getting married are exempt up to a certain amount.
    • Charity exemption. Any gifts you make to a 'qualifying' charity - during your lifetime or in your will - will be exempt from Inheritance Tax. A donation to charity in your will may also reduce the rate that tax is paid at.
    • Business, Woodland, Heritage and Farm Relief. If the deceased owned a business, farm, woodland or National Heritage property, some relief from Inheritance Tax may be available.
With the exception of the last two exemptions, I'm hoping to use all of the above (I'm an almost daily charity shopper/giver).

You Need Will-power

The spouse exemption is one of your most powerful tax-reduction tools. To minimise or even avoid Income Tax you should transfer any income-producing assets between the two of you. To minimise IHT you need a will - or rather two identical wills, with each other as the beneficiary.

By having two 'mirror wills' for each spouse, the whole estate can be left to the survivor. That survivor will then benefit from the double IHT 'nil rate band'. (You can do all of that for £57 at Ten Minute Will - if your personal situation is fairly uncomplicated.)

Get the Taxman to Give You Money

In addition to using those IHT exemptions, I'm planning to use a little tax trick that will effectively recover and pass on all of the Income Tax that I am paying (I'm not paying much!).

The tax trick (which I've written about before) is a long-standing concession offered by HMRC (the Taxman): even if someone has no taxable income, they can invest up to £3600 annually in a pension - and receive a refund of the equivalent amount of basic rate tax. So, effectively, they only have to deposit £2880 and this is topped up by the Taxman to £3600. That's a 25% return, without even trying!

With the introduction of low-cost Self-Invested Personal Pensions (SIPPs) it because possible for a DIY investor to operate a pension at a very reasonable cost (even at virtually no cost, if you chose wisely).

Quite neatly, the annual £2880 tax-refunding pension contribution (described above) falls within the annual £3000 IHT allowance. So with two children, my wife and I can make a contribution to each annually. Depending on how long we can keep that up, it should build to a sizable investment.

And a child's pension is unequivocally outside the estate of the parents.

SIPPs for Children

Given that life is going to be more difficult for our kids, I'm expecting that they will require financial help all along the way - but I would also like to make sure that:
  1.  I avoid as much tax (including IHT) as possible
  2. They can't fritter it all away

So some of their inheritance is going into a SIPP. They won't be able to touch it until later life by which time it will (hopefully) have grown into a substantial nest-egg. What is more, with job pensions becoming less and less generous, this additional pension should make their later lives (and the lives of our putative grandchildren) more comfortable.

And that is in addition to any other financial help we might give them that falls within the other IHT exemption (e.g. marriage, Potentially Exempt Transfers, etc.)

Which SIPP?

Candid Money offers a comprehensive overview of the SIPPs on offer. They distinguish between those offering funds (horror!) or the more DIY shares/bonds options.

I have used SippDeal's iSipp for my wife's pension for a number of years now. The only charges I paid were for dealing. Unfortunately they have now been acquired by YouInvest and will be charging an annual fee - but as I am quite satisfied with the product, I don't really mind that, and they will still be quite competitive.


If you are married with kids (but depending on your own specific situation):
  • you should plan for IHT and discuss it with friends and advisers
  • (if your personal situation is straightforward) one option is to write a will that leaves everything to your spouse - this gives you the double 'nil rate band' exemption
  • to transfer money from your estate and get a top-up from the Taxman, open maximum no-income tax-return SIPPs (£2880 each per annum) for your spouse and children

Then invest this SIPP money wisely.

I am not a financial adviser and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.


  1. Good advice, particularly the part about investing in a SIPP for your children. The power of compound interest is very significant if you start young (I have actually discussed benefits of this on my own blog).

  2. May be just worth adding that many AIM-listed shares are exempt from IHT after being held for just two years.

  3. Don't overlook the ability to give away surplus income (i.e. regular gifting of income as part of normal expenditure). It is free of IHT immediately, as long as HMRC are happy that it's above board (they check after your death, so your heirs need to hang on to the paperwork).

  4. What SIPP did you use for your kids? I'm looking at this option right now. Based on what I can afford £25 / month for each child the one that seems to stand out is Aviva as others require a larger monthly contribution. The charge is 0.55% - which I'd be keen to get lower - especially if I can look at assigning part of our estates into a SIPP on the event of death.

    1. If that is all you can afford then I would suggest a different approach - it is unlikely that IHT will be an immediate problem. Use that money to improve your overall financial situation (e.g. pay down debt/mortgage) and delay the SIPP idea until later.

    2. Slowburn, Fidelity SIPP has an annual charge of .35%, and no fee for buying or selling funds.

    3. (Sharp intake of breath) Funds???

  5. Slowburn, the Fidelity SIPP charges .35%pa, and no dealing fees on funds.