2006 BUDGET

As widely predicted, left-over ASP funds will be subject to IHT other than to a spouse, civil partner or charity.

http://www.hmrc.gov.uk/budget2006/bn26.htm

Death of scheme member on or after age 75 Alternatively Secured Pension

7. The Government provides generous tax relief on pensions on the basis that pension funds are used to secure an income in retirement. The pensions tax simplification rules provide that an individual must secure an income before they reach the age of 75. For most people an annuity or scheme pension is the best means by which they can do this. The new pensions tax regime introduces an additional option for securing their retirement income, an Alternatively Secured Pension (ASP).

8. The Government made clear throughout the development of the new pensions tax regime that ASPs are specifically designed for those who have a principled religious objection to annuitisation. It has become clear that some individuals and their advisors are intending instead to use the ASP provisions for a much wider purpose to enable individuals to pass on tax-privileged retirement savings to their dependants rather than to provide a pension in retirement. In order to prevent this the Government is examining how best to restrict ASPs to their original limited purpose.

9. Following a consultation by HMRC, legislation will be introduced in the Finance Bill to ensure that appropriate IHT charges will apply on left-over ASP funds.

The Government will apply an IHT charge on left-over ASP funds on death (or later) as follows:

any funds paid as a transfer lump sum death benefit; (i.e. where the funds remain within the scheme for the benefit of other scheme members) or refunded to an employer or used to provide benefits for a dependant in the pension scheme context who is not a spouse, civil partner or person who is financially dependant will be subject to an IHT charge on the death of the original scheme member as if the funds were part of the scheme members own taxable estate on death;

any funds paid on the death of the scheme member to charity will be exempt from IHT, as will funds expended for the scheme members spouse, civil partner or person who is financially dependant on the scheme member;

any left-over funds, once use by the spouse, civil partner or person who is financially dependant (the beneficiary) has come to an end, will be chargeable to IHT on the earlier of the cessation of those benefits and the death of the beneficiary. These remaining funds will be treated as if they were an addition to the original scheme members estate. However, any left-over funds that are paid to charity will be exempt from IHT;

in certain circumstances, an IHT charge on ASP funds will fall on the estate of a dependant (rather than that of the original scheme member). This will apply where a dependant within the meaning of the pension scheme rules opts for an ASP derived from benefits inherited from a scheme member who died before age 75. Here, any left-over funds on the dependants death will be charged to IHT as if they were part of the dependants taxable estate on death.

The amendments to IHTA 1984 are in Chapter 25 Schedule 22 of:-

http://www.opsi.gov.uk/acts/acts2006/ukpga_20060025_en.pdf