In summary This is an important time to help guide clients through their retirement plans. Future risks remain uncertain and should be part of the overall consideration. Ensure your client understands the impact of sequencing risk and seek to manage that if it’s a concern. Pension tax relief planning remains a valuable tool to help your clients get to where they want to be. If you would like any further information from us, please speak to your M&G account manager. Considered the overall tax efficiency on the contribution where the donor is using the annual IHT exemption of £3,000. This contribution is paid into another person’s pension and receives 20% tax relief at source. If the recipient is a higher rate taxpayer they are able to claim back higher rate tax relief via their tax return, thereby creating wealth to that individual. And the overall effect is that for the contribution in this instance the ‘family’ gets 90% relief on the contribution (being the sum of IHT tax saved, pension relief at source tax relief and higher rate tax reclaim). Naturally the income tax position of the donor will also need to be factored in to determine the overall tax efficiency. Of course higher contributions could be made and still be IHT exempt under the gifts made as part of normal expenditure out of income rules. Normal expenditure out of income exemption Section 21 of the Inheritance Tax Act 1984 deals with the normal expenditure out of income exemption. It is an extremely important exemption for IHT planners. For the exemption to apply, it must be shown that a transfer of value meets three conditions: • It formed part of the transferor’s normal expenditure • It was made out of income (taking one year with another), and • It left the transferor with enough income to maintain his/ her normal standard of living. So will pensions count as income for the normal expenditure out of income exemption? In a word, yes. Although we have never seen categoric confirmation on the HMRC website, contemporaneous evidence tells us that pensions, whether tax free or taxable, PCLS or UFPLS, all count as income for the exemption. The other point to be aware of is that HMRC expect the normal expenditure to be at least 3 or 4 years to show an established pattern for the exemption. Another key time period is 2 years. Broadly speaking income does not stay income forever and will become capital if it just sits in your estate, as a rough rule of thumb HMRC state income becomes capital after two years. In the context of gifting pensions this means the pension withdrawal needs to be phased and gifted regularly not taken as a lump sum and then gifted regularly. [email protected] Tel: 0161 486 4890 www.paradigm.co.uk [email protected] Tel: 0808 234 0808 www.pruadviser.co.uk 9 Income Drawdown
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