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HMRC internal manual

Inheritance Tax Manual

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HM Revenue & Customs
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Pensions: scheme pensions and lifetime annuities: more examples

Example 1 ─ survivor dies after unauthorised payment (UP) charge,

Where there has been a charge to tax under IHTA84/S151D before the death of the surviving spouse or civil partner, IHTA84/S151E(11) provides the calculation to determine the percentage of unused nil rate band that is available when the survivor dies. The calculation ensures that the proportion of unused nil rate band that can be claimed on the death of the second spouse or civil partner reflects the proportion of the nil rate band that has already been used up by the charge under IHTA84/S151D.

John dies 2007 leaving a chargeable estate of £180,000 when the nil rate band is £300,000. An unauthorised payment charge arises when the nil rate band is £325,000 and John’s wife Susan dies when the nil rate band has risen to £350,000.

So for IHTA84/S151E(6) purposes M will be £300,000 ( the nil rate band maximum (NRBM) at John’s death) and VT will be £180,000.

The unauthorised payments charge arises when the nil rate band is £325,000. In charging tax on the unauthorised payment IHTA84/S151E(3) to (6) must be considered because the nil rate band has increased between John’s death and the date on which the unauthorised payment charge arises.

The nil rate band in the ‘applicable Table’ is £325,000. But, the nil rate band must be reduced and. S151E(6) shows how the amount of the reduction is calculated.

In the example the ‘applicable’ nil rate band is £325,000 but the nil rate band in force at John’s death is £300,000, so there is a difference of £25,000. Under IHTA84/S151E(6) the used up percentage is:

100 - {(E ÷ NRBM) x 100} or

100 - {(120,000 ÷ 300,000) x 100} or

100 - 40 or 60%

So the increase in the nil rate band of £25,000 is to be reduced by 60% or £15,000. Therefore the nil rate band for the purposes of charging tax when the unauthorised payment charge arises is £310,000.

When Susan dies the transferable nil rate band calculation has to be made with reference to IHTA84/S151E(10) and (11).

AE is still M-VT but the calculation of M is based on ANRBM (not NRBM) and VT is increased by the amount charged under IHTA84/S151D. If the unauthorised payment was £60,000 then VT is the non spouse legacies (£180,000) and the unauthorised payments charge (£60,000) = £240,000. M for the purposes of the IHTA84/S151E(11) formula will = ANRBM. So the percentage in s151E(11) is

M-VT x (100 ÷ ANRBM) or

£310,000 - £240,000 × (100 ÷ £310,000) = 22.58%

So the nil rate band on Susan’s death is £350,000 + (22.58% of £350,000) or £429,030.

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Example 2 ─ survivor dies before the UP charge,

Where the survivor dies before the UP charge, IHTA84/S151E(8) and (9) provide the calculation.

Steven dies in 2007 leaving a chargeable estate of £180,000 when the nil rate band is £300,000. Steven’s wife Jane dies when the nil rate band has risen £325,000. An unauthorised payment charge arises when the nil rate band is £350,000 and

So M will be £300,000 ( NRBM) and VT will be £180,000.

On Jane’s death the calculation of the enhanced nil rate band follows the ‘normal’ rules IHTM43020 so the nil rate band on Jane’s death is increased by 40% to £455,000. So the increase in the nil rate band is £130,000.

When the unauthorised payments charge arises IHTA84/S151E(8) requires us to reduce ‘appropriately’ the ‘personal NRBM’ of the member by the amount of the nil rate band that was used against Susan’s estate. The NRBM in the applicable Table is £350,000 (the NRBM when the unauthorised payments charge arises). We then reduce this figure by the cash amount of the NRBM enhancement on the death of the survivor. So the NRBM figure to be used when calculating tax on the unauthorised payments charge is £220,000 (£350,000 - £130,000).

Technical will advise on the extent of any IHT charges relating to Scheme Pensions or Lifetime Annuities and you may ask for help from the Board’s Actuarial Officer when calculating the IHT payable or using the UP calculator.