HMRC confirms USP/ASP withdrawals as income for IHT

HM Revenue & Customs (HMRC) has announced it considers withdrawals taken from unsecured pensions (USP) or alternatively secured pensions (ASP) as income for inheritance tax (IHT) purposes.

HMRC confirmed the classification in talks with Skandia which says it clears up uncertainty surrounding pension income drawdown.

The financial services industry previously did not know whether HMRC considered income from USP or ASP as income or partly income and partly capital for IHT exemption for normal expenditure out of income purposes.

The development means clients who have excess income from USP or ASP that they do not spend can give it away under the normal expenditure out of income exemption without incurring any IHT liability.

Consumers do not need to survive the gifts by seven years to avoid a tax liability on such gifts as the gifts already have exemption.

Colin Jelley, head of tax and financial planning at Skandia, says: “Where HMRC practice has not generally been known, we welcome the introduction of greater clarity.

“Advisers can now be clear on exactly where their clients in USP or ASP stand, and therefore make plans accordingly.

"The normal expenditure out of income exemption has no financial limit and so advisers should consider carefully whether their application would be relevant for any of their clients. If so, thinking about the audit trail at the beginning of the process is a worthwhile exercise.”

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Jennifer Bollen
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