Interaction with alternatively secured pensions: calculation of recapture charge on scheme member’s death where spouse dies and TNRB has been claimed before the recapture charge is triggered.
Where the spouse is not the relevant dependant, the death of the spouse before the relevant dependant will impact on the subsequent recapture charge. On the earlier death of the spouse, the prs will be able to claim to transfer the unused nil rate band and the amount used by the spouse’s estate will cut back the amount of the nil rate band available against the subsequent recapture charge. The example below is based on the example given at IHTM43048 -IHTM43050.
Jason dies on 10 April 2007. He leaves a legacy of £180,000 to his daughter, Julie, and the residue of his wife Helen. His estate includes an ASP fund of £500,000 which is used to provide benefits for Julie.
Helen dies on 14 August 2009 with an estate of £430,000 when the nil rate band was £325,000. A claim to transfer unused nil rate band of 40% is made, thus increasing the nil rate band available to £455,000.
Julie dies on 15 August 2010 when the ASP fund was worth £450,000 and nil rate band was £325,000.
The restriction at IHTM43049 applies and so the nil rate band to be used in calculating the recapture charge is £310,000. This is further reduced under IHTA84/S151BA(10) by the amount of transferable nil rate band available on Helen’s death that was actually used. Here, the nil rate band was increased by £130,000; but only £105,000 was needed to keep the spouse’s estate out of tax.
So the restricted nil rate band (£310,000) is “appropriately reduced” by deducting the nil rate band used by the spouse’s estate (£105,000) to give a new figures of £205,000.
The value on which the recapture charge will be calculated now follows the calculation set out in IHTA84/S151A, although IHTA84/S151BA(1) specifies that the amount of the fund in charge under IHTA84/S151B(3) is the relevant amount for the purposes of IHTA84/S151A(2). So the chargeable transfer for the purposes of the recapture charge is the chargeable estate on Jason’s death plus the value of the ASP fund at Julie’s death
180,000 + 450,000 = 630,000
However, in order to reflect the UP charge that will be levied on the ASP funds IHTA84/S151A(4B) applies the provisions of IHTA84/S151A(4C); but only where the maximum amount that could have been transferred on Jason’s death at nil percent, as reduced at IHTM43049, exceeds that aggregate chargeable transfer after deducting the ASP fund where that fund has not been subject to a UP charge.
In this example, the maximum amount that could have been transferred on Jason’s death, as adjusted, is £205,000. This exceeds the aggregate chargeable transfer less the ASP fund (as this has not been subject to a UP charge) of £180,000, so the provisions of IHTA84/S151A(4C) are in point.
The effect of these provisions is to adjust the nil rate band maximum available to the ASP charge to reflect the fact that the ASP funds may suffer income tax of up to 70%. The calculation is
(UNRB x100) ÷ (100 - MUPR)
- UNRB is the unused nil rate band calculated under IHTA84/S151A(4B) - in this example £215,000 - £180,000 = £25,000, and
- MUPR is the maximum unauthorised payment rate that can apply. This is 70% whether or not the ASP fund actually bears income tax at 70%.
So in this example, the unused nil rate band is increased as follows
(25,000 x 100) ÷ (100 -70) = £83,334.
On recalculating the position, the estate on death exhausts the revised nil rate band, leaving the ASP fund fully chargeable at 40%.
In order to assess the case on COMPASS, you should include £450,000 as the capital value of the fund and increase that value to reflect the difference between the nil rate band that COMPASS will apply (£350,000) and the actual nil rate band used on the death estate - in this case £180,000. Include the chargeable value of the estate on death as the equivalent of a previous cumulative total.
Note - had the ASP fund been subject to a UP charge, the net value in charge would have been £135,000 (£450,000 - 70%). Adding this to the estate on death would have given an aggregate chargeable transfer of £315,000. This exceeds the reduced and restricted nil rate band of £205,000 and gives rise to an IHT liability of £44,000. This exhausts the nil rate band and leaves none available for transfer. To assess the case on COMPASS, you will need to increase the value of the fund in charge by the difference between the nil rate band that COMPASS will apply (£325,000) and the restricted nil rate band £205,000.