EIM15410 - Non-approved and employer-financed retirement benefits schemes: example: payment on non-accidental death

Section 394 ITEPA 2003 and Section 612(1) ICTA 1988 (non-approved schemes) and Section 393B ITEPA 2003 (employer-financed schemes)

An employee died of natural causes on 1 April 1999.

The director of the personnel department of the company the employee worked for decides to make an ex-gratia payment to the employee's spouse of £50,000. This payment is in addition to a lump sum of £12,500 payable to the employee's estate under the terms of the employer's approved retirement benefits scheme (see EIM15010 at the 2nd paragraph).

The £50,000 payment is made on 20 April 1999. Because this date falls before 6 April 2006, you consider whether the scheme is a non-approved scheme (see EIM15010).

An ex-gratia payment like this is a gratuity - a gift - and so is a “relevant benefit” (see the definition of relevant benefit in EIM15021). So a retirement benefits scheme is created by the payment (see the definition of scheme in EIM15028).

The payment is not from a scheme approved by Audit & Pension Scheme Services (APSS) and so is not exempt from tax (see EIM15010 at the 2nd paragraph). Neither can it be given approved status under Statement of Practice 13/91 because:

• there is another lump sum benefit (of £12,500) from an approved scheme payable in respect of the employment, so the first test in EIM15170 is not met
• the sum is over the limit (£7,550 for 99/2000) for a small payment approval (see EIM15172).

The payment is chargeable on the spouse of the employee and counts as employment income (see EIM15035) for the year of receipt 1999/2000 (see EIM15038).

See example EIM15415 regarding death by accident.

Example 2: employer-financed scheme

The facts are as in Example 1 above except that the payment is made on 1 September 2006. Because this falls after 5 April 2006, you consider whether the scheme is an employer- financed scheme (see EIM15010).

A gift on death in these circumstances is a “relevant benefit” (see EIM15021) so an employer- financed scheme is created by the payment (see EIM15028)

The payment is chargeable on the spouse of the employee and counts as employment income (see EIM15035) for the year of receipt 2006/07 (see EIM15038)