RPSM04106030 - Technical pages: Taxation: Inheritance tax and unauthorised payment tax charges on alternatively secured pension funds and dependants' alternatively secured pension funds

Death on or after 6 April 2007: Example where tax charges in respect of an unauthorised payment are due in relation to remaining alternatively secured pension funds but not inheritance tax

Malcolm is a member of a registered pension scheme and has an arrangement under that scheme which provides alternatively secured pension. Malcolm has no other pension arrangements in this or any other registered pension scheme that provide alternatively secured pension or any other type of pension benefit.

Malcolm dies on 1st June 2007, age 85.

The value of Malcolm’s alternatively secured pension fund immediately before death is £200,000.

Malcolm leaves no dependants and the remaining alternatively secured pension funds of £200,000 are not paid as a charity lump sum death benefit. (Any remaining alternatively secured pension funds paid as a charity lump sum death benefit would be exempt from inheritance tax.)

The scheme administrator sends an account of the remaining funds of £200,000 to HMRC Inheritance Tax using forms IHT100 and IHT100g the deadline for submitting the forms being 12 months after the end of the month in which Malcolm died.

The value of Malcolm’s chargeable estate for inheritance tax purposes, excluding the remaining alternatively secured pension funds at the date of Malcolm’s death, is also £200,000. After taking into account the inheritance tax ‘nil-rate band’ of £300,000 for the tax year 2007/2008, there is no inheritance tax due in respect of that part of Malcolm’s estate. Also there is a balance of unused nil-rate band of £100,000 (£300,000 less that part of Malcolm’s chargeable estate, £200,000, not including the remaining alternatively secured pension funds).

The remaining alternatively secured pension funds at the date of Malcolm’s death are then considered by HMRC Inheritance Tax to determine whether or not any inheritance tax is due in respect of the remaining funds. First, the remaining nil-rate band is ‘grossed up’ as no tax under Part 4 of Finance Act 2004 has been paid in respect of the remaining funds. This is done using the formula:

‘UNRB’ is the amount of the remaining nil-rate band

‘MUPR’ is the ‘maximum unauthorised payments rate’, which is the maximum rate of tax that would apply under Part 4 of Finance Act 2004 in respect of an unauthorised payment. Taking into account the unauthorised payments charge, unauthorised payments surcharge and the scheme sanction charge, the maximum rate of tax that can apply to an unauthorised payment is, in effect, 70%

The grossed up nil-rate band is:

As the amount of the remaining alternatively secured pension funds being considered for inheritance tax, £200,000, is less than the grossed up nil-rate band there is no inheritance tax due in respect of those funds.

Once HMRC Inheritance Tax is satisfied that there is no tax to pay, HMRC Inheritance Tax issues a clearance letter to the scheme administrator confirming that no inheritance tax is due in respect of the remaining alternatively secured pension funds. Although in this example it would take a substantial adjustment to the Malcolm’s estate for the alternatively secured pension funds to be liable to inheritance tax that may not always be the case.

See RPSM04106031 for the continuation of this example in relation to paying out the alternatively secured pension funds upon confirmation of no inheritance tax being due.