Treat IHT problems with a simple operation

Fitting a ‘spousal bypass’ may sound like an uncomfortable procedure, but it’s actually a very simple way to pass on more of your wealth to the younger generation. Minesh Patel of EA Financial Solutions explains.

man walking on plank

Last year, George Osborne announced his plans to remove tax on lump sum death benefits.  Such a move is broadly welcomed – but here’s a word of warning for anyone receiving a lump sum who then wants to pass that sum on to the next generation. Although pension lump sums won’t be taxable when passed on to surviving spouses, they will be added to the taxable estate (if not spent first) when the surviving partner eventually dies.

Think about what forms the bulk of most people’s personal wealth. Of course, it’s generally their home and a lifetime of pension savings (children can hold pension assets too). Husbands and wives will have pension savings in their own right, and with the favourable tax treatment on contributions, the size of an individual’s pension pot can grow incredibly quickly. But once an individual’s ‘nil rate band’ exemptions are used up, inheritance tax (which usually falls on the children to pay) is chargeable at 40 per cent.

But there is one straightforward piece of financial planning which can reduce the burden of IHT on the next generation. This is to alter the nominated beneficiary for pension death benefits, in favour of a ‘spousal bypass trust’. Usually, when someone starts a pension plan, they are asked to nominate someone to whom their pension benefits will be paid on their death; that someone is typically the spouse.

Using a spousal bypass trust instead of nominating beneficiaries for pension lump sum benefits can provide an effective solution to a potential inheritance tax problem. What’s more, it still allows the surviving spouse to benefit in the form of a right to withdrawals from the fund.

You should of course seek professional advice yourself before taking any action. Speak to a financial adviser to find out more about passing on your wealth to your loved ones.