RPSM04106070 - Technical pages: Taxation: Inheritance tax and unauthorised payment tax charges on alternatively secured pension funds and dependants' alternatively secured pension funds where the member died before age 75

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 dependants’ alternatively secured pension funds

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

Don dies on 1st June 2007, age 72.

The value of Don’s unsecured pension fund immediately before death is £300,000.

Don leaves a dependant, Humphrey, (who is over age 75) and all of the remaining unsecured pension funds of £300,000 are used to provide a dependants’ alternatively secured pension for Humphrey within 6 months of Don’s death.

The scheme administrator provides information about the chargeable event that arises on Don’s death using form IHT105; the deadline for submitting the forms being 12 months after the end of the month in which Don died.

Humphrey dies on 1st September 2008.

The value of Humphrey’s alternatively secured pension funds immediately before Humphrey’s death is £305,000.

Humphrey had no other dependant benefit rights under any registered pension scheme.

The scheme administrator sends an account of the remaining funds of £305,000 in relation to Humphrey’s estate (not Don’s estate) 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 Humphrey died.

The value of Humphrey’s chargeable estate for inheritance tax purposes, excluding the remaining dependants’ alternatively secured pension funds, is £300,000. This value is now set against the inheritance tax ‘nil-rate band’ for the tax year in which Humphrey died; being £312,000 for 2008/2009. There is no inheritance tax due in respect of that part of Humphrey’s estate. Also there is a balance of unused nil-rate band of £12,000 (£312,000 less that part of Humphrey’s chargeable estate, £300,000, not including the remaining dependants’ alternatively secured pension funds) to be set-off against Humphrey’s dependants’ alternatively secured pension funds.

The dependants’ alternatively secured pension funds remaining at Humphrey’s death are then considered by HMRC Inheritance Tax to determine whether or not any inheritance tax is due in respect of those remaining funds in relation to Humphrey’s chargeable estate (not Don’s chargeable estate).

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 dependants’ alternatively secured pension funds. The grossed up remaining nil-rate band is £40,000. ( RPSM04106030 explains how the nil-rate band is grossed up.)

After allowing for the grossed up remaining nil-rate band, inheritance tax is due in respect of £265,000 worth of the dependants’ alternatively secured pension funds that remained at Humphrey’s death (£305,000 - £40,000).

HMRC Inheritance Tax issues an inheritance tax calculation of £106,000 (£265,000 x 40%) to the scheme administrator.

The inheritance tax liability of the scheme administrator is met out of the remaining dependants’ alternatively secured pension funds and the liability is due on 31 March 2009 (6 months after the end of the month in which Humphrey died).

Once the inheritance tax position is settled the balance of the remaining dependants’ alternatively secured pension funds is paid out of the scheme as an unauthorised member payment. RPSM04106031 gives an example of the tax charges that would apply to such an unauthorised payment.