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HMRC internal manual

Pensions Tax Manual

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The lifetime allowance and the lifetime allowance charge: Liability for the lifetime allowance charge in the member’s lifetime

Glossary PTM000001
   

 

Who is liable (on any BCE other than BCE 5C, BCE 5D or BCE 7) 
How the scheme administrator accounts for the lifetime allowance charge 
Discharge of the scheme administrator’s liability 
Where the member fails to declare their available lifetime allowance 
Distributing an assumed chargeable amount
Where a lifetime allowance charge is deducted incorrectly

Who is liable (on any BCE other than BCE 5C, BCE5 D or BCE 7)

Sections 217, 215(6) to (11) and 267 Finance Act 2004

Where the lifetime allowance charge arises on the payment of a relevant post-death benefit crystallisation event, the liability for the charge falls on the recipient or the dependant or nominee as appropriate. The process involved here is explained at PTM087000.

With all other benefit crystallisation events (BCEs) where a lifetime allowance charge arises, the member and the scheme administrator of the scheme where the chargeable amount arises are jointly and severally liable to the lifetime allowance charge due on that amount.

Joint and several liability

Joint and several liability means that both the scheme administrator and the member are equally and separately liable to the whole charge, and that payment by one will discharge the liability of the other(s), to the extent of the amount paid.

To meet their obligation, the scheme administrator must pay and account to HMRC for any lifetime allowance charge that arises in respect of any scheme member at a BCE taking place under their scheme. They do this through online quarterly scheme returns - see PTM162100. But if they fail to do this because they have acted on incomplete or incorrect information provided by the member, they may be discharged from their liability to the tax charge where they can show and HMRC accepts that it would not be just or reasonable for them to be liable for it. In that case, liability for the charge would fall solely on the member - see below.

The scheme may deduct the tax due from the member’s pension and lump sum entitlements under the scheme. Or, the scheme can choose to fund the tax due themselves from the scheme’s own resources. However, where the scheme funds the charge (or part of it) without correspondingly reducing the rights of the member the level of charge due will be higher - see PTM085000.

The member is required to include their own liability to the charge on their personal Self-Assessment tax return. The member can claim a credit on their Self Assessment return for the tax paid by the scheme administrator. The scheme administrator will provide a notice confirming the rate of charge due and the amount paid by the scheme to help the individual do this - see PTM164100.

Assuming the scheme administrator has paid the correct amount of tax due this will remove any further liability for the member.

The lifetime allowance charge applies regardless of whether any of the persons liable to it are resident or domiciled in the UK.

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How the scheme administrator accounts for the lifetime allowance charge

Section 254 Finance Act 2004

Regulation 3 The Registered Pension Schemes (Accounting and Assessment) Regulations 2005 - SI 2005/3454

The scheme administrator is obliged to pay over and account to HMRC for any lifetime allowance charge due following a BCE occurring in a member’s lifetime through the Accounting for Tax (AFT) return, using the Pension Schemes Online Service. So the tax due is accounted for after the payment or commencement of any benefit, designation to dependants’ or nominees’ flexi-access drawdown pension fund, or payment of a transfer value where the fund is being transferred to a qualifying recognised overseas pension scheme.

PTM162100 gives further details on the form to use, what information must be provided on the form and when and how an amended AFT return should be made.

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Discharge of the scheme administrator’s liability

Section 267 Finance Act 2004

The Registered Pension Schemes (Discharge of Liabilities under Sections 267 and 268 of the Finance Act 2004) Regulations 2005 - SI 2005/3452

As the scheme administrator is relying largely on declarations made by the member, there will be circumstances where the scheme administrator is at least initially unaware they have failed to reduce a member’s rights and payments at a BCE, when in fact a chargeable amount did crystallise at that BCE. Alternatively they do deduct an amount to cover a level of lifetime allowance charge they ascertain as due, but not by an amount sufficient to cover the correct amount due.

This means that the scheme administrator may find themselves jointly liable for a charge but did not retain enough, or any, of the member’s funds/rights within the scheme to meet that liability (because, for example, all the monies were paid out to purchase an annuity).

Where this happens the scheme administrator can apply to HMRC to be discharged from their liability to the charge due on the grounds that it would not be just or reasonable for them to be liable for it. This application must be in writing, and made within certain deadlines. See PTM135100.

PTM158000 explains the process of application for discharge of liability and the deadline for application in more detail. This deadline varies, depending on whether the scheme administrator is a company or individual.

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Where the member fails to declare their available lifetime allowance

Section 217 Finance Act 2004

Where the scheme administrator contacts the member before the BCE, in order to ascertain their available lifetime allowance and the member does not respond, then, where possible, the scheme administrator should simply postpone the event triggering the BCE until the information and evidence required is provided.

However, there are some circumstances where the event cannot be postponed. For example, where the scheme rules require benefit payment on a particular date, or where the individual reaches their 75th birthday without taking benefits, so either BCE 5 or BCE 5B is triggered.

As liability for the lifetime allowance charge is joint and several between the member and the scheme administrator then, where the member fails to make a full disclosure, the scheme administrator will want to ensure that the correct amount of tax is paid. The scheme administrator is therefore likely, depending on the circumstances, to assume that the member has already used up all of their lifetime allowance and treat the whole capital value now crystallising at that BCE as a chargeable amount, subject to a lifetime allowance charge.

The scheme administrator is likely to do this regardless of whether the individual has failed to respond wilfully, through negligence, or is simply unable to reply accurately because they are awaiting statements from other registered pension schemes where they have recently crystallised benefits.

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Distributing an assumed chargeable amount

Where the scheme administrator treats the whole amount crystallising at a BCE (or BCEs) as a chargeable amount, because the individual fails to respond to their enquiries, there is still the issue of how the chargeable amount crystallising should be distributed by the scheme administrator. In other words, should it be paid as a lump sum or retained within the scheme to provide a pension benefit.

Where crystallisation occurs at age 75 because the member has failed to draw benefits, it is already a matter of fact that the rights are being retained in the scheme until the member decides to draw benefits. So there is no decision for the scheme administrator to make.

However, whatever the circumstances, the scheme administrator should not distribute the assumed chargeable amount by commuting pension benefits and making a full lump sum payment on the assumption that a lifetime allowance excess lump sum may be paid (for the reason explained below). They should only make such a payment where they have full disclosure from the scheme member. The scheme administrator should instead retain the funds within the scheme to provide a pension benefit.

As the scheme administrator is assuming that the individual has no available lifetime allowance this rules out the payment of a pension commencement lump sum, an uncrystallised funds pension lump sum and a serious ill-health lump sum, all of which are dependent on having available lifetime allowance. However, this does not necessarily mean that entitlement to a pension commencement lump sum is lost, as there are provisions permitting the retrospective payment of such a lump sum where it turns out that no chargeable amount in fact arose - see below.

In this circumstance the scheme administrator will always be dealing with BCE 1, BCE 2, BCE 4, BCE 5 or BCE 5B. The crystallised amount assumed to be a chargeable amount will be treated as a retained amount, with the lifetime allowance charge deducted and accounted for at the rate of 25 per cent.

Why a lifetime allowance excess lump sum should not be paid

Sections 240, 241 and 268 Finance Act 2004

If the scheme administrator pays a lifetime allowance excess lump sum (PTM084000) when one is not due, an unauthorised member payment has been made. All unauthorised payments made by a scheme automatically attract a scheme sanction charge on the scheme administrator, unless the payment is exempt under the legislation. Payments made in such circumstances are not exempt.

HMRC would not accept in such circumstances that the scheme administrator should be discharged from liability for the scheme sanction charge under the ‘discharge’ provisions in the legislation. This is because if the scheme has clearly acted on insufficient information they could not be said to have reasonably believed that the payment was not a scheme chargeable payment. To avoid this situation arising, the scheme administrator should therefore restrict the form of benefits crystallising in this circumstance to pension benefits only.

Taxation of unauthorised member payments and scheme chargeable payments are dealt with in more detail in PTM134100.

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Where a lifetime allowance charge is deducted incorrectly

Regulations 6 and 7 The Registered Pension Schemes (Accounting and Assessment) Regulations 2005 - SI 2005/3454

Where the scheme administrator treats the whole amount crystallising at a BCE as a chargeable amount either because, for example, the member fails to respond to their questions, or makes an error, what turns out to be an excessive lifetime allowance charge may be claimed back at a later date. The scheme administrator should submit to HMRC, an amendment to any previously submitted AFT return, in which the excessive lifetime allowance charge was originally reported. The administrator should make the amended AFT return through Pension Schemes Online Services. The amended return therefore relates to the original return for the quarter in which the overpayment was made.

HMRC will then make a repayment to the scheme administrator. A repayment carries repayment interest from the later of the due date or the date of payment.

Paragraph 1(6) Schedule 29 Finance Act 2004

The Registered Pension Schemes (Meaning of Pension Commencement Lump Sum) Regulations 2006 - SI 2006/135 as amended by SI 2007/3533

The scheme administrator may use part or all of the refund to pay a further lump sum. If the scheme administrator pays the lump sum within 12 months of the day it receives the refund of the overpaid lifetime allowance charge from HMRC, it can be treated as a pension commencement lump sum for tax purposes.

The lump sum can be treated as a pension commencement lump sum in these circumstances even if the payment is made outside the normal period for a pension commencement lump sum, that is the 18-month period starting 6 months before and ending 12 months after the entitlement arises to the connected pension / lifetime annuity / unsecured pension. The other pension commencement lump sum conditions must of course also be satisfied; for example, there is a maximum amount that can be treated as a pension commencement lump sum - see PTM063200.