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HMRC internal manual

Inheritance Tax Manual

Interaction with alternatively secured pensions: calculation of recapture charge on scheme member’s death and TNRB where spouse dies after the recapture charge.

Where the spouse is not the relevant dependent and the recapture charge arises first, this will use up some more of the nil rate band available on the scheme member’s death and so the percentage calculated under IHTA/S8A(3) will need to be revised. The process is largely the same as that described at IHTM43048 - IHTM43050; but is reworked here with values that show the effect of IHTA/S1512BA(12).

Example

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 £200,000 which is used to provide benefits for Julie.

The unused nil rate band is 40%.

Julie dies on 14 August 2009 when the nil rate band was £325,000 and the ASP fund £120,000.

Helen dies on 15 August 2010 leaving and estate of £750,000 when the nil rate band was £325,000.

When the recapture charge arises in 2009, the restriction described at IHTM43049 applies. The difference between the nil rate bands of £325,000 and £300,000 is £25,000 so the used-up percentage is 60% or £15,000. The nil rate applicable on the dependent’s death is therefore cut back from £325,000 to £310,000 for the purposes of calculating the ASP charge.

We also need to take account of the UP charge that will be levied so the test in IHTA/S151A(4B) (IHTM43050) is in point. In this example, the maximum amount that could have been transferred on the scheme member’s death, as adjusted, is £310,000. 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.

So in this example, the unused nil rate band (£310,000 - 180,000) is increased as follows

(130,000 x 100) ÷ (100 - 70) = £433,333

As this exceeds the value of the ASP fund at the date of the dependent’s death (£120,000) there is no tax to pay on the ASP fund.

The final stage is to establish to what extent there is any nil rate band to transfer [IHTM43050].

As Helen did not die before the ASP charge arose, the percentage referred to in IHTA84/S8A(3) is adjusted under IHTA84/S151BA(11). The formula to use is contained in IHTA84/S151BA(12) and is

AE ÷ ANRBM x 100

where

  • AE is the adjusted excess; that is the amount by which M would be greater than VT [IHTM43020], where

    • M = ANRBM which is the nil rate band maximum as adjusted under IHTA84/S151BA(6) or £310,000 (see IHMT 43049), and
    • VT = the chargeable value of the transfer on death, including the taxable ASP fund or £300,000

So AE is £10,000 and the revised percentage available for transfer on Helen’s death is

(10,000 x 310,000) x 100 = 3.2258%

When Helen dies, her nil rate band of £325,000 will be uprated to £335,484.

Note - had the ASP fund been subject to a UP charge, the net value would have been £36,000. Adding this to the estate on death would have given an aggregate chargeable transfer of £216,000, which is below the adjusted nil rate band and so no IHT would have been payable. To establish the amount of nil rate band available to transfer, we use the formula contained in IHTA84/S151BA(12), which is

AE ÷ ANRBM x 100

where

  • AE is the adjusted excess; that is the amount by which M would be greater than VT [IHTM43020], where

    • M = ANRBM which is the nil rate band maximum as adjusted under IHTA84/S151BA(6) or £310,000 (see IHTM43049), and
    • VT = the chargeable value of the transfer on death, including the taxable ASP fund or £216,000

So AE is £94,000 and the revised percentage available for transfer on Helen’s death is

(94,000 x 310,000) x 100 = 30.3226%

When Helen dies, her nil rate band of £325,000 will be uprated to £423,548.