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HMRC internal manual

Inheritance Tax Manual

Pensions: Scheme pensions and lifetime annuities: calculation of the tax charge on scheme pensions

The charges on scheme pensions and lifetime annuities are provided for in IHTA84/S151D and S151E. The charges are similar to those that apply to Alternatively Secured Pension schemes (IHTM17350) and arise where members or dependants of members of Registered Pension Schemes die after reaching age 75. These provisions apply to deaths occurring on or after 6 April 2008.

The circumstances in which the provisions apply are contained in IHTA84/S151D(1) and are that:

  • a member or a dependant of a member of a Registered Pension Schemes dies on or after age 75,
  • before their death they had rights to payments under a pension scheme to a relevant pension or annuity, and
  • a relevant unauthorised payment is made by that pension scheme,

Where all these conditions apply, IHTA84/S151D(2) provides that an Inheritance Tax charge will arise.

The Inheritance Tax charge will be based on the ‘relevant unauthorised payment’ paid in respect of the deceased member or dependant, less the unauthorised payment charges that have arisen on that payment. The chargeable amount is calculated in the same way as if a transfer of value was made on the death of the member or dependant, and the amount chargeable to Inheritance Tax is treated as the top slice of the estate of the scheme member or dependant.

The rates of Inheritance Tax to be used are those in force at the time when the ‘relevant unauthorised payment’ is made. However, the rates have to be adjusted to take account of

  • estates that were not liable to IHT on the scheme member’s death, IHTA84/S151E(5), and
  • where the deceased was entitled to transfer unused nil rate band from the estate of a pre-deceasing spouse or civil partner, IHTA84/S151E(8)..

The rules for calculating the amount of the nil rate band or transferable nil rate band that can be used are complex and you should ask for advice from Technical if a relevant case is seen