A client wishes to leave a number of specific assets to beneficiaries free of IHT. Rather than paying the IHT from the residue, the client is asking if it is possible to request in a letter of wishes that a sum held in a SIPP which is outside the estate and subject to a discretionary trust is made available to pay the tax. As there is no obligation to make the payment and the assets would not be part of the estate at the date of death, would the sum paid be free from an IHT charge?
Normally SIPP funds are discretionary trusts - if the discretion is defeated/over-ruled by specific instruction then the value of the payment is added to the estate. An alternative is nomination of benefits / expression of wishes to the trustees in a manner that would meet the objective, be it in £’s or %'s, but remains within the discretion of the trustees.
A specific gift that does not bear its own tax, which is the general rule, will be received free of IHT and cause any IHT to be paid by residue. It can be made to bear its own tax by a direction in the Will but there will be grossing up unless all such gifts bear their own tax or are within the NRB or are relieved e.g by BPR or APR and the residue is fully chargeable. Grossing up increases the amount of tax payable on the estate overall.
To compensate residuary beneficiaries for having to meet tax on someone else’s gift of course a payment can be made from a separate trust of which they are eligible beneficiaries. The trustees as stated will be under no obligation. The IHT consequences of that for the trust will be whatever they are and unaffected by either the trustees’ purpose or the beneficiary’s use of the money, but almost certainly no charge to IHT. There may be other tax consequences, for example if the deceased was over 75 income tax may be due from the beneficiary.
Agree with the above.
We used to use pilot trusts for pension funds, refs Jack’s comments. Not sure if they’d still work from a tax perspective.