Many inheritance tax (IHT) planning strategies involve making significant capital payments. The objective in doing so is to reduce the taxable estate. A trust is often used to retain control over the ultimate destination and timing of benefits.

One option is to use the tax advantages offered by contributions to registered pension schemes for ‘others’.

People mistakenly believe that you will be limited to a contribution of up to £3,600 gross for your children or grandchildren. When the initial reply is followed up by the supplementary question; ‘what if that child is in employment and earning £50,000 per year?’ the size of the opportunity becomes apparent.

  • The estate of the donor reduces
  • Contributions are not limited to £3,600 per annum if the child has earned income
  • Basic rate relief at source from HMRC effectively increases the gift by 25%
  • The recipient, not the contributor, may benefit from a reduction in their tax bill if they are a higher or additional rate payer –  particularly valuable if they are affected by the Child Benefit or other high earner tax traps
  • The fund enjoys tax-advantaged growth – it suffers no Income Tax or Capital Gains Tax charges
  • It can be used to relieve children and/or grandchildren of the need to fund their pension at a time when their resources may be stretched, but when the benefit of pension contributions could be greatest
  • The recipient usually has no access to the gift until he/she attains the normal minimum pension age which is currently 55
  • Should the recipient die before age 75, tax-free death benefits may be payable from the pension pot


The table below shows the effect of investing £1,000 per month and the value of the investment remaining in the investor’s estate:

Surplus income per month £1,000
Value (if invested) after 10 years
5% return net of charges, paid monthly in advance (source Prudential 30.6.23)
IHT payable on death
(where no Nil Rate Band available) 
Net Value after IHT £93,557

However, if £1,000 per month is paid into a pension, the fund receives an additional £250 top up from HMRC. The position then would be:

The recipient’s tax position  Basic rate taxpayer Higher rate taxpayer Additional rate taxpayer
Accumulated pension fund after 10 years £194,912 £194,912 £194,912
Tax saving for beneficiary in year of contribution £0 £3,000 £3,750


  • IHT saved for ‘the parent’ would be £62,372 assuming 40% IHT rate
  • The accumulated value is greater due to the tax relief at source reclaimed by the pension provider
  • Children with exposure to Income Tax at above basic rate tax will see a further tax saving

We would be delighted to advise you on how to minimise your Inheritance Tax liabilities

The team at Ellacotts would be pleased to discuss how making pension contributions for a child or grandchild could form a valuable Income Tax and Inheritance Tax planning tool for your family. Please contact your usual Ellacotts contact or the Wealth Planning team on or 01295 250401.

You can also send us an enquiry here and one of our team will get back to you.

Read our blog to find out what gifts are classed as exempt from Inheritance Tax.

Information for readers: This material is published for the information of clients. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the authors or the firm.