The number of reports of paternal epigenetic influences on the phenotype of offspring in rodents is increasing but the molecular events involved remain unclear. Here, we show that haploinsufficiency for the histone 3 lysine 9 methyltransferase Setdb1 in the sire can influence the coat colour phenotype of wild type offspring. This effect occurs when the allele that directly drives coat colour is inherited from the dam, inferring that the effect involves an "in trans" step. The implication of this finding is that epigenetic state of the sperm can alter the expression of genes inherited on the maternally derived chromosomes. Whole genome bisulphite sequencing revealed that Setdb1 mutant mice show DNA hypomethylation at specific classes of transposable elements in the sperm. Our results identify Setdb1 as a paternal effect gene in the mouse and suggest that epigenetic inheritance may be more likely in individuals with altered levels of epigenetic modifiers.