Interaction with alternatively secured pensions: calculations where the deceased’s estate includes funds in an alternatively secured pension
The IHT provisions for alternatively secured pensions (ASP) have been changed to reflect the interaction of an ASP charge with the transfer of unused nil rate band. The calculations are complex and involve a number of stages. Where the IHT nil rate band was not fully used when the original ‘owner’ of the ASP died, the same proportion that was unused will be applied to the amount of the nil rate band in force at the date of the later event and be available against the charge on the ASP funds - in other words, the full amount of the unused nil rate band is restricted when the later charge arises. The calculations then need to take into account whether the ASP charge arises before or after the death of the survivor and to reflect the fact that the ASP funds will be subject to an Unauthorised Payment (UP) charge.
Jason dies on 10 April 2007. He leaves legacies of £180,000 to his children and the residue of his wife Helen. His estate includes an ASP fund of £500,000 which is used to provide benefits for Helen.
On Jason’s death, IHT is charged on £180,000, leaving unused nil rate band of £120,000 (the value of the ASP fund is reduced to nil under IHTA84/S151A(3) and the charge deferred).
Helen dies on 15 August 2010. She leaves her estate of £750,000 to her children. The nil rate band is £325,000 and the value of the ASP fund is £480,000. In the normal course of events, the nil rate band of £325,000 would be increased by 40% to £490,000.
However, as a result of Helen’s death, the deferred charge on the ASP now arises on the deceased’s estate under IHTA84/S151B(1). This may use up all or part of the unused nil rate band, eliminating or reducing the amount available for transfer. Tax is charged under IHTA84/S151A; but with the rate of tax determined under IHTA84/S151BA.
The ‘relevant amount’ for IHTA84/S151A is the amount of the of the ASP fund at Helen’s death or £480,000, IHTA84/S151B(3). The rate of tax is that in force at Helen’s death, IHTA84/S151BA(5) so the nil rate band to use is £325,000.
When the ASP fund (£480,000) is added to the estate chargeable on Jason’s death (£180,000) the aggregate value of £660,000 exceeds the nil rate band of £325,000 so, at first glance, tax is now payable on the ASP fund and there will be no nil rate band to transfer. But this does not take into account restriction of the nil rate band or the UP charge that may arise.
This example continues on page IHTM43049.