Inheritance Tax meets Child Benefit Tax

3 min read 6 Apr 23

By The Technical Team

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 (HICBC) 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, It’s also worth noting that the HICBC starts before the adjusted net income of the highest earner moves into higher rate tax

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:

There is a member of household receiving child benefit and
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 net relief at source contribution 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 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 £2,901 Bank Balance after income tax and child benefit tax charge - £10,000 - £3,946 - £2,901 = £3,153
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 £3,153 Child Benefit Tax saving £2,901 Higher Rate Relief £1,946 £8,000
Benefit Lowered IHT liability Passed on more wealth	Benefit Pension funding started £10,000 pot Additional Income £4,847 Money for today and tomorrow.
Family Tax Saving
Inheritance Tax Child Benefit Relief at Source Higher Rate Relief Total	£3,200 £2,901 £2,000 £1,946 £10,047
125% 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 £1,073 Bank Balance after income tax and child benefit tax charge - £3,750 - £1,446 - £1,073 = £1,231
Solution Write cheque for £3,000 (or £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 £1,231 Child Benefit Tax saving £1,073 Higher Rate Relief £696 £3,000
Benefit Lowered IHT liability Passed on more wealth	Benefit Pension funding started £3,750 pot Additional Income £1,769 Money for today and tomorrow.
Family Tax Saving
Inheritance Tax Child Benefit Relief at Source Higher Rate Relief Total	£1,200 £1,073 £750 £696 £3,719
124% relief from an £3,000 cheque!

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