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HMRC internal manual

Pensions Tax Manual

The lifetime allowance and the lifetime allowance charge: liability for the lifetime allowance charge when the member has died

Glossary PTM000001
   

 

Liability for the lifetime allowance charge where a relevant post-death BCE is paid 
Where there is more than one relevant post-death BCE 
Example where more than one relevant lump sum death benefit has been paid 
Assessing the recipient

Sections 206, 217(2) to (5) and 219(7) Finance Act 2004

Regulations 4 ‘case 3’, 4(2) and 4(4) The Registered Pension Schemes (Accounting and Assessment) Regulations 2005 - SI 2005/3454

Liability for the lifetime allowance charge where a relevant post-death BCE is paid

Where a chargeable amount arises through a relevant post-death BCE, that is:

  • a BCE 7 following the payment of a relevant lump sum death benefit, or
  • a BCE 5C on designation of relevant unused uncrystallised funds for payment of a dependants’ or nominees’ flexi-access drawdown pension where the member died aged under 75 and the designation was made within the 2-year period
  • a BCE 5D where a member dies before their 75th birthday and unused uncrystallised funds remaining at death are used to provide entitlement to a purchased dependants’ or nominees’ annuity. The death must be on or after 3 December 2014 with the entitlement arising on or after 6 April 2015 but before the end of a two-year period (see PTM088660)

the liability for the arising lifetime allowance charge falls solely on the recipient(s), dependant or nominee as appropriate. The lifetime allowance charge applies regardless of whether or not the recipient, dependant or nominee of the relevant post-death BCE is resident or domiciled in the UK. PTM085000 applies equally to the chargeable amount/lifetime allowance charge arising following the payment of a relevant post-death BCE.

Responsibility of the personal representatives

The personal representatives of the member are responsible for ascertaining whether a chargeable amount arose following the payment of a relevant post-death BCE. They only do this after the payment of any lump sum death benefit, the date of designation for a BCE 5C or the date the person becomes entitled to the annuity for BCE 5D.

The scheme administrator will pay the lump sum death benefits in full, without regard to any lifetime allowance charge that may potentially be due. They will not take any money out of the funds designated for drawdown or to purchase an annuity to pay any potential lifetime allowance charge.

Where the personal representatives identify a chargeable amount, they must report this to HMRC, who then assesses the recipient of any payment giving rise to a chargeable amount - see PTM165000.

Lump sum death benefit paid after age 75

For avoidance of doubt, where a defined benefits lump sum death benefit or an uncrystallised funds lump sum death benefit is paid and the member dies on or after 6 April 2011, after reaching age 75, the lump sum is not a relevant lump sum death benefit although it is an authorised member payment. There is no BCE and no test against the deceased member’s available lifetime allowance. Such lump sums are instead subject to an income tax charge.  Where the lump sum was paid on or after 6 April 2016, see PTM073010.  For earlier payments, see the detailed guidance for defined benefits lump sum death benefit (PTM073100) or uncrystallised funds lump sum death benefit (PTM073200) as appropriate.

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Where there is more than one relevant post-death BCE

When more than one post-death BCE occurs following the death of a member, the date of crystallisation is taken as:

  • the date of payment of the relevant lump sum benefit through each BCE 7, or
  • the date of designation for each BCE 5C, or
  • the date the person becomes entitled to the annuity for BCE 5D.

However, for the purposes of calculating the amount of available lifetime allowance the deceased had left prior to the BCE, the BCEs are treated as all occurring simultaneously, immediately before the death of the member.

This differs from the position where a BCE occurs in the member’s lifetime, where the member (generally) has the right to choose the order of crystallisation where two or more BCEs occur on the same day.

The reason for treating the BCEs as occurring simultaneously is to ensure that where more than one relevant post-death BCE occurs following the member’s death, any arising lifetime allowance charge liability is allocated fairly where there are two or more recipients. This is an issue where the member has some available lifetime allowance left at the point of death.

Where those benefits were paid to, or funds were designated for flexi-access drawdown for more than one recipient, the lifetime allowance charge liability of each recipient is apportioned by HMRC on a ‘just and reasonable’ basis. In practice this will mean the amount is apportioned pro-rata between recipients according to the amount received by each, so that each recipient is liable for only a proportionate share of the total amount of tax payable. The recipients are not jointly and severally liable for the entire amount of tax.

These rules do not mean that the amount crystallised through BCE 7, BCE 5C or BCE 5D has to be valued on the basis of rights/funds held at the time of the member’s death. The amount crystallised will be the amount that was actually paid as a lump sum death benefit, or designated for dependants’ or nominees’ flexi-access drawdown pension or applied to purchase the annuity.

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Example where more than one relevant lump sum death benefit has been paid

Ray dies aged 69. The standard lifetime allowance in this year was £1.8 million. Ray leaves behind a wife, Joan, and a son, David (who is not a dependant of Ray).

Ray had drawn benefits, using up 80 per cent of the standard lifetime allowance at the time of his death. He was not entitled to an enhanced lifetime allowance.

Ray also held uncrystallised funds worth £600,000 under a money purchase scheme when he died. These funds were split equally between three money purchase arrangements.

One of the arrangements provides David with an uncrystallised funds lump sum death benefit of £200,000 four weeks after Ray’s death. The other two arrangements are used to provide Joan with benefits. Joan chooses to also to take an uncrystallised funds lump sum death benefit from the two arrangements. This is paid six weeks after Ray’s death, worth £400,000.

The scheme administrator reports these payments to Ray’s personal representatives.

£200,000 crystallises through BCE 7 and £400,000 crystallises through BCE 7 on different dates. However, for the purposes of calculating Ray’s available lifetime allowance immediately before each BCE, both crystallisations are deemed to have occurred at the same time.

Ray had 20 per cent of the standard lifetime allowance available before he died. This equates to £360,000, based on the standard lifetime allowance of £1.8 million for the tax year.

A chargeable amount of £240,000 arises (£600,000 - £360,000), giving a lifetime allowance charge of £132,000 (55 per cent of £240,000). Ray’s personal representatives report this to HMRC, giving details of the amounts and schemes that made the payments.

HMRC ascertains from the paying scheme who the payments were made to.

  • David’s portion of the liability is assessed by HMRC as £44,000 (one third of the lifetime allowance charge due). This is because he received one third of the combined relevant lump sum death benefits paid that gave rise to the chargeable amount.
  • Joan’s portion of the liability is assessed by HMRC as £88,000 (two thirds of the lifetime allowance charge due). This is because she received two thirds of the combined relevant lump sum death benefits paid that gave rise to the chargeable amount.

HMRC assessed David and Joan in these proportions because it was a just and reasonable way of dividing the liability.

Liability for the lifetime allowance charge arises when the BCE actually occurs, which in the case of BCE 7 is when the relevant lump sum death benefit is paid. So David and Joan are both liable for the lifetime allowance charge in the tax year.

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Assessing the recipient

Where the member’s personal representatives identify a chargeable amount following the payment of a relevant lump sum death benefit (BCE 7) or the designation of dependants’ or nominees’ flexi-access drawdown pension (BCE 5C) or a person becoming entitled to a dependants’ or nominees’ annuity (BCE 5D) they must report this to HMRC. HMRC then assesses the recipient, dependant or nominee, as the case may be, for the lifetime allowance charge due:

  • the lifetime allowance charge due will always be at the rate of 55 per cent for a relevant lump sum death benefit (as it will be triggered by a lump sum payment, so the chargeable amount will always be a lump sum amount) (BCE 7).
  • the lifetime allowance charge due will always be at the rate of 25 per cent for a dependants’ or nominees’ designation for flexi-access drawdown pension (BCE 5C) or entitlement to an annuity (BCE 5D).