Did you know we’re most likely to receive a significant inheritance in our 40s, 50s, or 60s?

This happens simply because older relatives live well into their late 70s, 80s, or 90s, meaning their children are often middle-aged or approaching retirement when they pass.

That means inheritance — and any inheritance tax (IHT) bill — tends to hit us during the stage in life we’re most likely to be paying 40% income tax

It’s painful, isn’t it?

Our parents work hard their whole lives building wealth, and when they pass a fair chunk of their efforts goes to the tax office.

If this happens, you may have to pay that tax, but there’s a way we can recoup some of our losses to soften the blow. That’s by harnessing the power of your SIPP (Self-Invested Personal Pension).

I’ll assume by this stage of life you’re earning more than you truly need and have built at least some financial stability?

This means the inheritance is surplus to requirements unless you’re of the belief you must buy a bigger house, yacht, or tennis court in your back garden.

Why not invest into your pension instead, and claw back some of that tax?

After all, if you’re in your 40s, 50s, or perhaps your 60s, you’re approaching retirement anyway (if not already).

From the current minimum pension access age (57 from 2028) you can withdraw 25% of your pension tax free if you choose to do so (capped at £268,275 at the time of writing), or leave it earning interest and withdraw it gradually to better your retirement.

This is how the strategy works: Consider the high-income tax portion of your salary, of which you pay 40% or more of every £1 you earn in income tax.

While you do not receive tax relief on the inheritance itself, using some of it to cover living expenses allows you to contribute more of your earned income into your SIPP. This is the portion of your income that attracts tax relief at your highest marginal rate, effectively reducing the tax you would otherwise pay.

Let’s say your salary is £80,000 per annum, of which £30,000 (roughly) incurs the higher 40% rate of income tax.

If your SIPP uses relief at source, HMRC will top up your contribution by 20% automatically. This means, to cover the £30,000 of your salary in the 40% bracket, the following will apply to achieve a £30,000 gross contribution:

• You pay in: £24,000
• HMRC adds: £6,000
• Total (gross): £30,000

Note: This assumes you have at least £30,000 of relevant earned income and that you remain within your annual pension allowance (currently £60,000), or can make use of any carry-forward from previous years. Contributions beyond these limits may not attract full tax relief.

Assuming you have a sizable inheritance, you can repeat this process year on year to continue avoiding the high-income tax threshold.

How good is that?

Depending on your situation, you may want to recoup the lower tax threshold as well.

The beauty of this approach is twofold.

Not only are you sheltering a portion of your inheritance in a tax-efficient wrapper, but you are also letting it grow over time with the benefit of compounding returns inside the SIPP.

Over the long term, what might have been partially eroded by inheritance tax can become a strong pillar of your retirement wealth.

While it doesn’t remove the inheritance tax already due on your inheritance, this strategy allows you to channel your capital in a way that reduces the bite of other taxes.

You will need to stay within the rules on pension contributions, especially regarding annual allowances and carry-forward opportunities, but by doing so you turn what could be a tax headache into a strategic advantage, letting your inheritance work harder for you, and giving you more control over your financial future!