Can You Split a SIPP Between Spouse and Children to Reduce Inheritance Tax?

I currently have a SIPP for which I need to nominate beneficiaries. I am retired with sufficient income and assets, and hence kept this pot as a means of passing it on to my children and grandchildren.

Given the Inheritance Tax changes coming in 2027, and that the value is over 500k, I want to make a tax-efficient decision on naming beneficiaries.

My question is: can I nominate multiple beneficiaries so that I use the IHT allowance for the money to be passed to the children, and the remainder over the IHT allowance to be passed on to my spouse, since he will not be liable for IHT?

This is quite a complicated issue. For maximum tax efficiency, you should ensure that you have taken tax-free cash from your pension. Whoever you leave your estate to, this tax-free component disappears when you pass.

Beyond that, all transfers to a spouse on death are exempt from Inheritance Tax. It is therefore potentially wise to leave everything to your spouse in a reciprocal arrangement and then write further provisions in the event that either of you lasts longest. Both your own nil-rate bandThe nil rate band is the amount you can pass on when you die without any inheritance tax being due. It's currently £325,000 and stays frozen until April 2028 — anything above it gets taxed at 40%. If you're leaving your home to children or grandchildren, you may also get an extra £175,000 allowance (called the residence nil rate band), taking your personal total to £500,000. Married couples and civil partners can combine their allowances, meaning up to £1 million can pass on tax-free between them. A couple of things worth knowing: the residence allowance starts tapering away if your estate is worth over £2 million, and any gifts made in the seven years before you die can eat into your nil rate band. and residence nil-rate band will transfer to your spouse in full and be usable on their death.

A caveat here is that if the first to die has an estate over £2m, you may lose some of your residence nil-rate band to the tapering rulesThe rule: The RNRB is reduced by £1 for every £2 that the net value of the estate exceeds £2 million. The net value means the estate after liabilities (e.g. an outstanding mortgage) but before reliefs and exemptions. The cut-off points: For individuals, the RNRB reduces to zero on estates over £2.35 million. For married couples, it reduces to zero on estates over £2.7 million. The important nuance for couples: Tapering can also reduce the amount of RNRB available to transfer to a surviving spouse or civil partner, even if no RNRB was used when the first of the couple passed. So if the first to pass has an estate over £2 million, the surviving spouse doesn't inherit the full unused allowance — they inherit a reduced one. Worth noting from 2027: From 6 April 2027, most pension benefits will be included in a person's estate for IHT, and the value will count towards the RNRB £2 million taper threshold. for estates of that size. If you can split assets between you so that you both stay under this threshold, it will allow for the survivor to have the maximum transferable exemptions. Your residence nil-rate band of £175,000 each will only apply if you are leaving a property of sufficient value to your direct lineal descendants, but the order in which it is applied means that you only need property equity of £350,000 to make use of the full allowance.

A further caveat is your age. If you pass away under age 75, your pension beneficiaries will pay no income tax on drawing a beneficiary pension. If you passed aged 75 or over, then they will pay their marginal rate of income tax. If the pension is reserved for your children, then you could decide to take the pension and gift it during your lifetime. In some circumstances, you would be able to take advantage of the gifting out of excess income rules, which would make these gifts ‘exempt transfers’. This will save you IHT, but will mean paying your marginal rate of tax on the drawings. There are also rules to abide by to qualify for this.

In short, the calculation of IHT and income tax in this scenario depends on your circumstances.

There is a complicated balance of inputs required to make a decision here. But the simplest answer I can give is that you probably don’t need to worry about making use of your own exemptions on first death, as the most significant ones will pass to your spouse.