Pensions on or after 6 April 2006: scheme pensions and lifetime annuities: examples
Example 1 Scheme Pension
Alan has a scheme pension payable from a small family scheme. He takes a relatively low pension compared with the assets that have been earmarked to provide that pension. On his death at 76 the scheme has a surplus of assets over liabilities and decides to pay this out as a lump sum of £500,000 to Alan’s grandson, Robert. This is an unauthorised payment on which Income Tax unauthorised payment charges of 70% £350,000 are due.
Because Alan had a scheme pension and died after 75, and an unauthorised payment has been made in respect of his death, this triggers an Inheritance Tax charge under IHTA84/S151D. The calculation of both the Inheritance Tax charge and the Income Tax charge on the unauthorised payment will require the use of the unauthorised payments calculator.
Inheritance Tax will be due on £133,929 (£500,000 less the unauthorised payment (UP) charges of £312,500 and the IHT liability). This figure reflects the fact that the amount of the UP charged to Income Tax is net of the Inheritance Tax charge.. The occasion of the charge will be the date on which the unauthorised payment is made (rather than the date of the member’s death) and the tax must be paid within 6 months of that date. There is no remaining nil rate band on the member’s estate, so the Inheritance Tax due is £53,571 (£133,929 x 40%). The scheme administrator is liable to pay the IHT due.
Example 2 Scheme Pension
Alice has a scheme pension. She died at 78 on 1 January 2009 and as a consequence of her death the pension rights of her daughter were increased on 28 February 2009. This created an unauthorised payment of £500,000 and, after taking account of any IHT payable, Income Tax unauthorised payment charges of 70% are due. This in turn triggered an IHT charge on 28 February 2009. The nil rate band when Alice died was £300,000 and the value of the other assets in her estate was £250,000.
Using the UP calculator £139,286 (£500,000 less unauthorised payment charges of £325,000 and less the IHT liability) is treated as the top slice of Alice’s estate. After allowing for the unused nil rate band of £50,000 there is an IHT liability of £35,714 (£89,286 @ 40%). The tax must be paid by the scheme administrator by 1 September 2009.
Example 3 Lifetime Annuity
Alfred has a lifetime annuity. He dies at 78 and on 31 January 2009 the insurance company pays a lump sum of £50,000 to Alfred’s son, James. This is an unauthorised payment on which Income Tax unauthorised payment charges of £23,305 (55% of £50,000 less Inheritance Tax of £7,627) are due. An Inheritance Tax charge arises.
The value of the other assets in Alfred’s estate have used up all the nil rate band. So £19,068 is added to the member’s estate on which Inheritance Tax of £7,627 is due. This must be paid by the scheme administrator by 1 August 2009.
On 31 August 2009 the insurance company makes a further lump sum payment of £100,000 to James. Again this is unauthorised and unauthorised payment charges of £62,500 (70% of £100,000 less Inheritance Tax of £10,714 ) are due. An Inheritance Tax charge arises on 31 August 2009 and £26,786 is added to Alfred’s estate. The scheme administrator must pay the Inheritance Tax of £10,714 by 1 March 2010.