Pensions: treatment of alternatively secured pensions from 6 April 2007: interaction of the UP charge and the IHT charge
Where no ASP funds have been paid out before the initial payment of IHT falls due, (on the last day of the sixth month after the member died) the charge to IHT is on the full value of the ASP funds without deduction for Income Tax. The subsequent UP charge is levied on funds after deduction of the IHT paid.
Conversely, where an unauthorised payment triggering a UP charge has been made before the initial payment of IHT falls due, the charge to IHT is on the value of the ASP funds after deduction of the Income Tax due following the unauthorised payment.
The aggregate of the two tax charges will be the same, although the order in which they occur may affect who is liable for the tax.
In most cases you should calculate the IHT due on the figure returned by the scheme administrator. It does not matter whether we take IHT on the full value of the funds or on the value after deduction of the Income Tax due following the UP charge; the corresponding UP charge will balance the IHT charge. Where there is a deduction for Income Tax; provided this is 70% (or more rarely 55%) of the ASP funds (IHTM17350), there is no need to question or verify any amount deducted for the UP charge.
However, where the chargeable value of the deceased’s estate, except for the ASP funds, is below the IHT nil rate band (NRB) there will be some unused NRB to be set against the charge arising on the ASP funds. It is then very important to establish whether or not a UP charge has occurred before the IHT charge becomes due - as is shown in the example at (IHTM17407).
The grossing applies even if the unauthorised payment is not subsequently made (IHTM17411).