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HMRC internal manual

Inheritance Tax Manual

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HM Revenue & Customs
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Pensions: alternatively secured pension (ASP) between 6 April 2006 and 5 April 2007: position on the death of a relevant dependant or on ceasing to be a relevant dependant

The legislation is contained in IHTA84/S151B and applies where

  • a person who was a relevant dependant of a scheme member and who immediately before their death or on ceasing to be a relevant dependant (for example a minor child reaching majority) had funds in a dependant’s unsecured pension or a dependant’s ASP, and
  • the scheme member had attained age 75 and immediately before their death had funds in an ASP, and
  • the value of the ASP funds was designated as available for the payment of dependant’s unsecured pension or dependant’s ASP to the relevant dependant within the specified time limit,

The value of the ASP funds are added to the scheme member’s estate and charged as if they had been part of the chargeable transfer on death and formed the highest part of the value of the scheme member’s chargeable estate. The amount of the chargeable ASP funds are defined in as the value of the dependant’s unsecured pension fund or ASP funds immediately before their death or when they ceased to be a relevant dependant of the scheme member. The chargeable amount of the dependant’s unsecured pension fund or ASP funds on the death of a relevant dependant is to be reduced by the amount of the funds paid to charity within the specified time

Example

Scheme member John dies in 2006 with an estate of £450,000. This includes an ASP fund worth £100,000 which was used to provide a dependant’s pension for John’s wife, Jean. At John’s date of death the Inheritance Tax nil rate band was £285,000 and the tax rate 40%. Jean dies in 2010, when the ASP fund is worth £80,000 and the IHT threshold is £325,000. The tax rate is still 40%,

Scenario 1

If John had left the whole of his estate to Jean the estate would have qualified for spouse exemption and the chargeable value would have been nil. On Jean’s death £80,000 is added to nil and as this is below the nil rate band of £325,000 there is no tax to pay.

Scenario 2

If the John had left £220,000 to his children and the remainder to Jean, the chargeable value on death would have been £220,000. On Jean’s death £80,000 is added to £220,000 giving a total of £300,000. Again, as this is below the nil rate band of £325,000 there is no tax to pay.

Scenario 3

If John had left £300,000 to his children and the remainder to Jean the chargeable value on his death would have been £300,000 and tax of £6,000 (40% of £15,000) would have been paid. On Jean’s death £80,000 is added to £300,000 = £380,000. After deduction of the nil rate band of £325,000 in force at Jean’s death, tax of £22,000 would be due.

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Note

Had Jean drawn an Unsecured Income until her death at say age 73 (or until ceasing to be a relevant dependant before attaining age 75) then the basis of the Inheritance Tax charge would be the same. In addition, though, there would be a pension scheme charge (FA04/S206) on a death benefit lump sum at 35% to be applied to the net ASP fund.

Had John left two financial dependants, Jack and Jill, who shared the ASP pot and who continued to draw income from their ASPs then the Inheritance Tax charge would not come in until the death of the survivor of Jack and Jill. Jack’s pot could be used to top up Jill’s unsecured pensions pot and Jill’s could be used to top up Jack’s.