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HMRC internal manual

Pensions Tax Manual

The lifetime allowance and the lifetime allowance charge: benefit crystallisation events: summary of the process for testing BCEs against the lifetime allowance when the member has died

 

Glossary PTM000001
   

 

 

Who must perform the lifetime allowance test for a BCE after the member has died? 
Reporting requirements for a BCE 5C, BCE 5D or BCE 7 following the member’s death 
Summary of the steps that should be followed 
Step 1: actions the scheme administrator must take - personal representatives 
Step 2: reporting actions the scheme administrator must take - HMRC (for BCE 7 only) 
Step 3: actions the personal representatives must take 
Step 4: reporting actions the individual’s personal representatives must take 
Step 5: HMRC asks the administrator for information 
Step 6: HMRC assesses any lifetime allowance charge 
Worked example

 

Who must perform the lifetime allowance test for a BCE after the member has died?

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

The Registered Pension Schemes (Provision of Information) Regulations 2006 - SI2006/567

BCE 5C, BCE 5D and BCE 7

BCE 5C, BCE 5D and BCE 7 are relevant post-death benefit crystallisation events (BCEs).

For more information on:

Where a relevant post-death BCE occurs following the death of a scheme member, the scheme administrator of the scheme in which the BCE arises is not responsible for testing whether or not that individual had sufficient available lifetime allowance to cover the amount crystallising at that BCE. Neither are they responsible for accounting for any lifetime allowance charge due.

The responsibility for finding out whether the deceased individual had sufficient available lifetime allowance to cover the amount crystallising lies with that individual’s personal representatives:

  • the recipient of the benefit, or the person entitled to the dependants’ or nominees’ flexi-access drawdown pension or annuity (as appropriate) is liable for any lifetime allowance charge arising on any chargeable amount crystallising through BCE 5C, BCE 5D or BCE7. It is accounted for after the BCE, following direct assessment of that recipient or beneficiary by HMRC
  • the scheme administrator is not jointly liable for the charge, and the scheme administrator making the lump sum death benefit payment or arranging the flexi-access drawdown fund or purchasing the annuity is not expected to deduct from it any potential charge due.

Where more than one relevant post-death BCE is paid following the death of an individual, whether from the same or different schemes, any lifetime allowance charge liability arising following the payment or designation or entitlement to any of those benefits is apportioned equitably between the (potentially) different recipients of those benefits.

If the member dies on or after their 75th birthday, nothing will crystallise for lifetime allowance purposes on or following their death as there can be no BCE after age 75 apart from BCE 3 (see PTM088630). So the payment of relevant lump sum death benefits where the member dies on or after their 75th birthday is not a BCE 7.

See PTM087000 for more information on liability for the lifetime allowance charge following the member’s death.

BCE9

A BCE 9 occurs in relation to the payment of certain authorised member payments prescribed in regulations, some of which relate to pre-death entitlements paid after death. See PTM088700

Although a BCE 9 may occur after the member’s death, the process for establishing how much of the member’s lifetime allowance has been used up at the BCE and whether there is a chargeable amount is the same as it would be during the member’s lifetime. The scheme administrator has a joint liability with the deceased member (through the member’s personal representatives).

Follow the process as for during the member’s lifetime at PTM088400.

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Reporting requirements for a BCE 5C, BCE 5D or BCE 7 following the member’s death

The reporting process where a relevant post-death BCE is triggered is guided by the Registered Pension Schemes (Provision of Information) Regulations 2006 (SI 2006/567). These regulations:

  • impose specific reporting requirements on both the personal representatives of the deceased scheme member and the scheme administrator of the scheme paying a relevant post-death BCE, and
  • give the personal representatives of the deceased scheme member the authority to obtain certain information from any scheme administrator or insurance company who retains details of earlier BCEs relating to that member.

These reporting requirements are described in PTM164400 onwards.

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Summary of the steps that should be followed

Regulations 7 to 10 The Registered Pension Schemes (Provision of Information) Regulations 2006 - SI 2006/567

The process can be divided into six steps, which all take place after the effective date of BCE 5C, BCE 5D or BCE7 (see PTM088660 or PTM088700).  Note however that for a BCE 5C or BCE 5D only steps 1 and 3 to 6 apply.  Step 2 applies to BCE 7 only.

The six steps are listed below. Each step is dealt with in more detail under the headings below, with a worked example.

  • Step 1: the scheme administrator tells the personal representatives of the deceased scheme member about the relevant lump sum death benefit payment or BCE 5C designation in their scheme or about the BCE 5D purchased annuity entitlement.
  • Step 2: for BCE 7 only, the scheme administrator reports the lump sum death benefit payment to HMRC where that payment (either alone, or in total with other such payments made under the scheme) comes to more than 50 per cent of the standard lifetime allowance for the tax year in which the individual died.
  • Step 3: the personal representatives calculate the available lifetime allowance at death, and whether the benefit payment or designation is chargeable.
  • To do this they should use from the deceased’s records of any lifetime allowance used up at earlier BCEs occurring in the deceased’s lifetime. If they are aware of a prior BCE, but do not have details of the lifetime allowance used up at that BCE, they can seek this information from the relevant scheme administrator or insurance company.
  • Step 4: the personal representatives report any chargeable amount to HMRC.
  • Step 5: On receiving a report, HMRC will find out from the scheme administrator of the appropriate registered pension scheme details of the recipients of those payments or designations.
  • Step 6: HMRC will assess the recipient(s) for the lifetime allowance charge due.

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Step 1: actions the scheme administrator must take - personal representatives

Regulation 8(2)(2A) and (2B) The Registered Pension Schemes (Provision of Information) Regulations 2006 - SI 2006/567

Section 98 Taxes Management Act 1970

As explained further at PTM165100, the scheme administrator must inform the personal representatives of the member of:

  • any relevant lump sum death benefit payment they have made, within 3 months of the (final) payment. They must state the date(s) of payment and the amount(s) paid
  • any BCE 5C designation, within 3 months of the date of the designation. They must state the date and amount designated
  • any BCE 5D entitlement, within 3 months of the person becoming entitled to the annuity.  They must state the date of entitlement and the amount or value applied to the purchase of the annuity
  • the percentage of the standard lifetime allowance expended by the BCE.

The scheme administrator is not obliged to disclose the identity of the recipient. See PTM165200.

When paying the lump sum or when the beneficiary designates to drawdown or becomes entitled to a purchased annuity using the relevant unused uncrystallised funds (as appropriate) the scheme administrator may, depending on the circumstances, want to tell the recipient or beneficiary that there may be an associated tax liability for which they are personally liable and inform them of the process involved - see Steps 2 to 6.

Identifying the member’s personal representatives

A scheme administrator will receive notification of the death of the member, probably from the next of kin. A scheme will require evidence, normally by way of a death certificate, before they pay out death benefits. At that time the scheme administrator should enquire as to who the individual’s personal representatives are, if this has not been made clear.

Personal representatives are defined in section 279 of the Finance Act 2004 as the persons responsible for administering the estate of the deceased.

Where the scheme administrator cannot identify the member’s personal representatives

A scheme administrator may not be able to identify the member’s personal representative within the time limit needed to report information, even though they have made reasonable efforts to do so. In these circumstances a report addressed to the personal representatives (e.g. “To the personal representatives of Joe Jones”) at the member’s last known address will fulfil the reporting requirement.

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Step 2: reporting actions the scheme administrator must take - HMRC (for BCE 7 only)

Regulation 3, ‘reportable event 2’, The Registered Pension Schemes (Provision of Information) Regulations 2006 - SI 2006/567

The scheme administrator must report a lump sum death benefit payment to HMRC where that payment, either alone, or with other lump sum death benefit payments made under the scheme, represents more than 50 per cent of the standard lifetime allowance for the tax year in which the individual died.

This reporting requirement applies to the payment of all types of authorised lump sum death benefit payments made by the scheme. It also applies to payments made in earlier tax years by that scheme in respect of that member.

The scheme administrator must make the report by 31 January following the end of the tax year the payment was made in, on the Event Report, using the Pension Schemes Online Service. PTM161000 explains more about the reporting process.

If the scheme administrator fails to do this they will become liable to penalties - see PTM159000

If exceptionally, the payment of death benefits giving rise to a lifetime allowance charge is not a reportable event, HMRC will exercise its powers under section 251 of Finance Act 2004 and Schedule 36 of Finance Act 2008 to require the scheme administrator to provide HMRC with information about recipients.

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Step 3: actions the personal representatives must take

Regulations 9, 7(3) and (4) and 8 The Registered Pension Schemes (Provision of Information) Regulations 2006 - SI 2006/567

The personal representatives of the deceased member must take steps to calculate the member’s available lifetime allowance at the time of the benefit payment or designation, and find out if a chargeable amount has arisen. In doing this, the personal representatives should take reasonable care and act on the basis of the information reasonably available to them.

The personal representatives will need to consider if the amount crystallising is covered by the member’s available lifetime allowance at the point of death, taking into account:

  • any enhanced lifetime allowance or enhanced protection entitlement,
  • any amount that has previously crystallised at earlier BCEs occurring in the member’s lifetime, and
  • any reduction in the member’s available lifetime allowance that occurred at any earlier BCE in the member’s lifetime due to any pre-commencement pension in payment.

A pre-commencement pension in payment at the time of the member’s death

In calculating the member’s available lifetime allowance, the personal representatives will need to take into account any pre-commencement pension (pensions that the member was receiving before death which came into payment before 6 April 2006), where the BCE 5C or BCE 5D or BCE 7(s) being triggered is (are) the first such BCE occurring in respect of that individual.

The crystallised value of such pensions is calculated by multiplying the annual rate of the pre-commencement pension in payment at the date of death by a factor of 25. The deceased member’s available lifetime allowance at that first BCE is reduced by this crystallised value.

For more information on pre-commencement pension see PTM088300.

The personal representatives will need to find out about any pension in payment to the deceased (including any pre-commencement pension) in order to settle the deceased’s affairs generally; if for nothing else but to tell the scheme or insurance company that the member has died and to stop the pension.

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Sources of information available to the personal representatives

A personal representative is responsible for settling the estate of the deceased. This includes settling all tax liabilities and debts of that individual. To do this they have to obtain information about the deceased’s income and spending, assets and liabilities. A personal representative is entitled to access to the financial records of the deceased.

The personal representatives should therefore normally be in a position to:

  • identify any registered pension schemes of which the individual was a member,
  • establish if the individual had an entitlement to an enhanced or protected lifetime allowance - see PTM091000, and
  • identify any pension that was in payment to the individual at the time of their death (including any lifetime annuity providing income to that individual and any pre-commencement pension in payment).

The personal representatives should also have access to:

  • any statements provided to the individual by the administrators of the above schemes (or by an insurance company providing them with a lifetime annuity income) notifying them of the total amount of lifetime allowance that had crystallised under that particular scheme (or in relation to that annuity contract) - see PTM164100
  • any certificates provided by HMRC evidencing any enhanced lifetime allowance or enhanced protection entitlement the individual had, and
  • any Self Assessment tax returns previously filed by the individual.

To help them find out whether or not a chargeable amount has arisen the personal representatives also have the power to seek information regarding earlier BCEs that occurred in respect of that individual in their lifetime from:

  • the scheme administrator of any registered pension scheme the individual has been a member of in their lifetime, and
  • any insurance company that has provided the individual with an annuity at any time in the individual’s lifetime.

The personal representatives must make such enquiries sufficiently early so they can adhere to the reporting requirements imposed on them in Step 4, bearing in mind that the regulations allow the scheme administrator or insurance company up to 2 months to provide the personal representatives with the requested information - see PTM165200.

Information the personal representatives may ask for from a scheme administrator or insurance company

Regulations 7, 8 and 9 The Registered Pension Schemes (Provision of Information) Regulations 2006 - SI 2006/567

An individual’s personal representatives may seek information regarding earlier BCEs that occurred in respect of that individual in their lifetime from:

  • the scheme administrator of any registered pension scheme the individual has been a member of, and
  • any insurance company that has provided the individual with an annuity at any time in the individual’s lifetime.

If requested, a scheme administrator must provide an individual’s personal representatives with details of:

  • the date of any BCE that occurred in relation to the deceased individual’s membership of that scheme, and
  • the amount that crystallised for lifetime allowance purposes at that (or those) BCE(s), expressed as a percentage of the standard lifetime allowance for the tax year the BCE(s) took place in (this is the same information provided to the member on a certificate at the time of the BCE or BCEs, or every tax year).

If requested, an insurance company that has provided the deceased individual with a lifetime annuity, as purchased from a registered pension scheme, must give the individual’s personal representatives details of:

  • the date the annuity was purchased, and
  • the amount that crystallised for lifetime allowance purposes when the annuity was purchased, expressed as a percentage of the standard lifetime allowance for the tax year the purchase took place in.

For the avoidance of doubt, this reporting requirement only covers an insurance company that had provided the individual with a lifetime annuity contract purchased for them in their capacity as a member of a registered pension scheme. Where a related dependants’ annuity was linked to that lifetime annuity provision, the crystallised value of that annuity would have been included in the amount that crystallised through BCE 4, and should be included in the above information provided to the personal representatives.

The reporting requirement does not apply to an insurance company providing the deceased with a scheme pension entitlement, a short-term annuity or an annuity contract solely as a dependant of a scheme member.

Section 98 Taxes Management Act 1970

A scheme administrator or insurance company who has been asked for the information above must provide that information to the personal representatives within 2 months of receipt of the request. If they fail to do this they will become liable to penalties - see PTM159000.

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Step 4: reporting actions the individual’s personal representatives must take

Regulation 10 The Registered Pension Schemes (Provision of Information) Regulations 2006 SI - 2006/567

If a chargeable amount arises, the personal representatives must make a report or further report to HMRC of the amount and lifetime allowance charge due by the following deadlines:

  • the later of the following two dates

    • 13 months after the individual’s death, or
    • 30 days after the personal representatives became aware that there was a chargeable amount to report (that is, when they have received information about any relevant post-death BCE from a scheme administrator that indicates that the deceased individual’s lifetime allowance has been exceeded)
    • where the above time limit has expired when the requirement to report arises, or the lump sum payment or drawdown designation is made after the personal representatives have made a report under the first bullet above, within 30 months of the individual’s death, or
  • where the personal representatives learn of any reportable payments or designations later than 30 months from the individual’s death, within 3 months of that discovery.

There is no prescribed form, but the information that must be provided to HMRC is as follows:

  • the name of the registered pension scheme in which each relevant post- death BCE has occurred , along with the name and address of the scheme administrator
  • the name of the deceased member in respect of whom each relevant post-death BCE occurred
  • the amount and date of each relevant post-death BCE, and
  • the level of chargeable amount in respect of which a lifetime allowance charge is payable that arose due to those BCEs.

Where a chargeable amount has arisen following the payment of more than one relevant post-death BCE from more than one registered pension scheme, the personal representatives should make only one (amalgamated) report to HMRC. If the personal representatives are satisfied there is no chargeable amount they do not have to make a report to HMRC.

Where a report is due, personal representatives who fail to report or who make reports outside the time limits may be liable to penalties.

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Step 5: HMRC asks the administrator for information

The Registered Pension Schemes (Provision of Information) Regulations 2006 - SI2006/567

Once HMRC has been informed that a chargeable amount arose following the BCE, they will write to the scheme administrator of the registered pension scheme concerned, to obtain the following information:

  • the name of the person to whom the payment was made
  • their last known address
  • that individual’s date of birth and national insurance number (if known)
  • the amount that was paid or designated or applied to purchase the annuity, and
  • the date on which the payment or designation was made, or the date on which the person became entitled to the annuity.

The scheme administrator has 30 days to provide the above information to HMRC. Failure to do so may result in penalties being imposed - see PTM159000.

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Step 6: HMRC assesses any lifetime allowance charge

Regulations 4 and 5 ‘case 3’ The Registered Pension Schemes (Accounting and Assessment) Regulations 2005 - SI2005/3454

When HMRC have the above information they will write to and then assess the lump sum recipient (or recipients), drawdown beneficiary (or beneficiaries) or person(s) entitled to the annuity, charging any lifetime allowance charge due.

Once assessed, the recipient/beneficiary/annuitant has 30 days from the issue of the notice of assessment to pay the due charge. Interest will accrue if the tax has not been accounted for by 31 January following the end of the tax year in which the BCE occurred.

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Worked example

Scenario

John died on 8 July 2015 aged 68, leaving a widow, Mary. His personal representatives are Smith & Partners. John had been a member of three registered pension schemes in his lifetime.

John was taking all his benefits from scheme A as flexi-access drawdown pension, and from scheme B as a scheme pension. John has taken no benefits from scheme C.

The funds remaining in scheme A are used to provide John’s son with a flexi-access drawdown fund lump sum death benefit. Scheme B provides Mary with a dependants’ scheme pension. As neither of these death benefits are within BCE 5C, BCE 5D or BCE 7, they do not affect the lifetime allowance position following John’s death.

Scheme C pays Mary a £395,000 defined benefit lump sum death benefit on 9 November 2015. This is a relevant lump sum death benefit falling within BCE 7. Scheme C tells Mary that there is a possibility that she will become liable to a lifetime allowance charge on the payment.

Step 1

Before 9 February 2016 (the 3 month deadline) the scheme C administrator informs Smith & Partners of the defined benefit lump sum death benefit payment, stating the amount and date of payment.

Step 2

As the amount is less than 50 per cent of the standard lifetime allowance for the 2015-16 tax year the scheme administrator does not have to make a report to HMRC.

Step 3

Smith & Partners must now find out if a chargeable amount crystallised through BCE 7 following the payment of the defined benefits lump sum death benefit. If there is a chargeable amount they must report this to HMRC by 8 August 2016 (Step 4).

Smith & Partners first need to find out how much John had crystallised previously in his lifetime at earlier BCEs, and whether or not he was entitled to an enhanced lifetime allowance. This will tell them how much of his lifetime allowance John had available when he died.

Every tax year John has been provided with a statement by the administrators of schemes A and B telling him how much of his lifetime allowance he had used up under these schemes at earlier BCEs. These statements enable Smith & Partners to calculate John’s available lifetime allowance.

However, Smith & Partners may not have these statements, or be unable to find them or be unsure that the certificates they hold are complete. They can therefore seek clarification from any of the administrators of schemes A, B and C of the amounts that have crystallised previously in respect of John under those schemes.

If John was entitled to an enhanced lifetime allowance he would have a certificate from HMRC confirming the lifetime allowance enhancement factor he was entitled to. John was not entitled to an enhanced lifetime allowance, but if they wish Smith & Partners can ask the scheme administrators whether John relied on an entitlement to an enhanced lifetime allowance at any of the BCEs that occurred under their schemes.

Smith & Partners are not convinced they have all John’s statements to hand so write to the administrators of scheme A, B and C. The schemes have 3 months to respond.

  • Scheme A says John had used up 50 per cent of the standard lifetime allowance under their scheme. (This related to a pension commencement lump sum and designation to drawdown during John’s lifetime).
  • Scheme B says John had used up 40 per cent of the standard lifetime allowance under their scheme. (This related to a pension commencement lump sum and the scheme pension).
  • Scheme C says John had used up no lifetime allowance under their scheme prior to the payment of the defined benefit lump sum death benefit.

Smith & Partners now know that John had used up 90 per cent of the standard lifetime allowance (his lifetime allowance entitlement) when he died. So he had 10 per cent available. This equates to £125,000 at the effective date of BCE 7, when the standard lifetime allowance is £1.25 million. They therefore calculate that a chargeable amount of £270,000 crystallised through BCE 7 in relation to the £395,000 defined benefit lump sum death benefit paid.

Step 4

Smith & Partners report the chargeable amount to HMRC, giving details of the scheme that paid the triggering lump sum death benefit, John’s name, the date of payment and the amount of the payment. They must do this by 8 August 2016 (within 13 months of John’s death).

Step 5

HMRC write to the administrator of scheme C asking for full details of the recipient(s) of the £395,000 lump sum payment and confirmation of the amount paid and date of payment. The scheme administrator has 2 months to respond.

They provide HMRC with the details in that timescale.

Step 6

HMRC will assess Mary for the £148,500 lifetime allowance charge due (55 per cent of the chargeable amount of £270,000).

Mary has 30 days from the date of the assessment to account for the due charge.