RPSM04106050 - 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 are due in respect of both inheritance tax and an unauthorised payment in relation to remaining alternatively secured pension funds

Olive is a member of two registered pension schemes (‘scheme 1’ and ‘scheme 2’) and has an arrangement under each scheme which provides alternatively secured pension. Olive has no other pension arrangements in those or any other registered pension scheme that provide alternatively secured pension or any other type of pension benefit.

Olive dies on 1st June 2007, age 79.

The value of Olive’s remaining alternatively secured pension funds immediately before death in scheme 1 is £500,000 and £700,000 in scheme 2.

Olive leaves no dependants and the remaining alternatively secured pension funds in either scheme 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 of scheme 1 and scheme 2 sends an account of the remaining funds of £500,000 and £700,000 respectively 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 Olive died. The full amount of the remaining ASP funds are returned as no payment has been made out of the funds since Olive’s death.

The value of Olive’s chargeable estate for inheritance tax purposes, excluding the remaining alternatively secured pension funds at the date of Olive’s death, is £1.2m. After taking into account the inheritance tax ‘nil-rate band’ of £300,000 for the tax year 2007/2008, the remainder of that part of Olive’s estate, £900,000 (£1.2m - £300,000 nil rate band), is liable to inheritance tax.

As the full amount of the nil-rate band has been used on Olive’s chargeable estate excluding the remaining alternatively secured pension funds, inheritance tax is due in respect of those remaining funds.

HMRC Inheritance Tax issues an inheritance tax calculation of £200,000 (£500,000 x 40%) to the scheme administrator of scheme 1 and a calculation of £280,000 (£700,000 x 40%) to the scheme administrator of scheme 2.

The inheritance tax liability of each scheme administrator is met out of the respective remaining alternatively secured pension funds and each liability is due by 31st December 2007.

Once the inheritance tax position is settled the balance of the remaining alternatively secured pension funds in scheme 1 and scheme 2 are paid out of the respective schemes as an unauthorised member payment. RPSM04106031 gives an example of the tax charges that would apply to such an unauthorised payment.