Pensions

Inheritance Tax meets Child Benefit Tax

Last Updated: 6 Apr 26 3 min read

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

1. Key Points

2. The facts

3. The planning

4. The case studies

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 £200 of Adjusted Net Income (ANI) over £60,000. Once £80,000 ANI exceeds 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:

There is a member of household receiving child benefit and
One member of the household has Adjusted Net Income in excess of £60,000 (even if they are not the recipient of the child benefit)

Identify the amount of Adjusted Net Income in excess of £60,000.

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 £80,000 Child Benefit for 3 children No pension provision
Problem IHT liability	Problem Limited disposable income Retirement funding shortfall Child benefit tax charge £3,268 Bank Balance on top £20,000 of income after income tax and child benefit tax charge = £20,000 - £8,000 - £3,268 (HICBC) = £8,732
Solution Write cheque for £16000 for 3rd party contribution Exempt or Potentially Exempt Transfer	Solution Receives £16,000 net pension contribution
Impact Potential IHT saving £16,000 x 40% = £6,400	Impact Pensions Grandparents paid £16,000 Basic Rate Tax Relief £4,000 Amount in Pension £20,000 Bank Balance on top £20,000 of income Previous £8,732 Child Benefit Tax saving £3,268 Higher Rate Relief £4,000 £16,000
Benefit Lowered IHT liability Passed on more wealth	Benefit Pension funding started £20,000 pot Additional Income £7,268 (mitigated HICBC and higher rate tax relief claimed) Money for today and tomorrow.
Potential Family Tax Saving
Inheritance Tax Child Benefit Relief at Source Higher Rate Relief Total	£6,400 £3,268 £4,000 £4,000 £17,668
110.42% relief from a £16,000 cheque!

Case study 2

Grandparents	Parents
Facts Estate in excess of Nil Rate Band Want to do IHT planning	Facts Adjusted Net Income £63,750 Child Benefit for 3 children No pension provision
Problem IHT liability	Problem Limited disposable income Retirement funding shortfall Child benefit tax charge £588 Bank Balance on income above £60,000 after income tax and child benefit tax charge - £3,750 - £1,500 (income tax) - £588 (HICBC)= £1,662
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 on top £3750 of income Previous £1,662 Child Benefit Tax saving £588 Higher Rate Relief £750 £3,000
Benefit Lowered IHT liability Passed on more wealth	Benefit Pension funding started £3,750 pot Additional Income £1,338 (mitigated HICBC and higher rate tax relief claimed) Money for today and tomorrow.
Family Tax Saving
Inheritance Tax Child Benefit Relief at Source Higher Rate Relief Total	£1,200 £588 £750 £750 £3,288
109.6% relief from an £3,000 cheque!

Tech Matters

Ask an expert

Submit your details and your question and one of your Account Managers will be in touch.

Submit a question

Find us on LinkedIn

M&G Wealth is a trademarked brand of the M&G plc group which encompasses M&G Wealth Advice Limited, M&G Wealth Investments LLP and Investment Funds Direct Limited. The legal entities under the M&G Wealth brand also work alongside The Prudential Assurance Company Limited, Prudential International Assurance plc and Prudential Distribution Limited in relation to the provision of certain products and services. To understand more about our businesses and brands, you can view the corporate and regulatory information for the aforementioned legal entities.