How inheritance tax planning can also help lower tax on a family basis and help with retirement planning.
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.
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.
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
Estate in excess of Nil Rate Band
Want to do IHT planning
Adjusted Net Income £60,000
Child Benefit for 3 children
No pension provision
Limited disposable income
Retirement funding shortfall
Child benefit tax charge £2,636
Bank Balance after income tax and child benefit tax charge -
£10,000 - £3,946 - £2,636 = £3,418
Write cheque for £8,000
Exempt or Potentially Exempt Transfer