A handy way to dodge inheritance tax

Obsessed with finding a way to avoid inheritance tax (IHT)? You aren't alone. A good proportion of the people who live in the southeast of the UK, own their house, and have some other assets, know that on their death some part of their wealth will end up in the hands of the state.

Some will be happy with that after all, we all benefit from the services offered by the public sector, so paying for their perpetuation after death isn't a problem for everyone.

Most aren't happy with it: they want to hand everything they can down to their children. It's good news, then, that Chancellor George Osborne sometimes appears to be on the side of the reasonably well off.

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We wrote about the abolition of the 55% death tax' on pension assets last week, but this week I want to look at the implications for creating an inheritance.

You're now to be able to pass your pension fund directly to your heirs. (As long as it is defined-contribution, as most private-sector pensions are, rather than defined-benefit, as most public-sector pensions are.)

They can take the lot tax-free if you are under 75 on death, or just pay tax at their marginal income-tax rate (which could, of course, be 0%) if you're over 75.

If you are worried about IHT, that's a great deal. Even if you aren't earning any income, you can put £2,880 a year into a pension, which will be grossed up for you to £3,600.

You will think that is a nice gift from the taxpayer to you. But now imagine you are well off; that you do this every year for 30 years; that it returns an average of 6% a year; and that you have no need for this cash on retirement.

Thanks to the magic of compounding, you will hand your child a fund worth around £300,000, from which they can draw an income as and when they like. That's a nice inheritance.

Put in a bit more (the limit is £40,000 every year) and you can put aside up to the lifetime allowance of £1.25m to keep inside what financial advisers are already calling long-term family saving plans', or multi-generational trust funds', rather than pensions.

If your child needs all the cash then they can withdraw it. If not, they can just leave it there to be "passed on, untaxed, in perpetuity with each generation taking an income", says Richard Evans in The Daily Telegraph.

The only thing you need to remember before you get too carried away by the idea of your multi-generational riches is that your will does not control who inherits your pension. Instead, this is done by signing a beneficiary nomination form. Make sure you get one of those from your provider and keep it up to date.