Dealing with a lifetime allowance charge on death
In a previous article I looked at the situation where individuals exceed their lifetime allowance (LTA) during their lifetime, and how the resultant LTA charge is calculated and accounted for. However, if a LTA charge is generated on the death of an individual, it’s dealt with in a different way.
A test against an individual’s LTA is carried out on the occurrence of a benefit crystallisation event (BCE). The BCEs that occur on death of an individual, before age 75, are referred to as relevant post-death BCEs.
Liability for a LTA charge arises where ‘chargeable amount’ is identified at a BCE. Chargeable amount is present when the amount crystallised at a BCE exceeds the individual’s remaining LTA.
Any chargeable amount generated on the payment of a relevant lump sum death benefit attracts an LTA charge of 55%. Alternatively, an LTA charge of 25% applies on the chargeable amount where funds on death are used to provide beneficiary’s drawdown or annuity.
For a relevant post-death BCE, the responsibility for ascertaining whether a chargeable amount has arisen rests with the deceased individual’s personal representatives, although the scheme administrator must provide them with certain information to enable them to meet this responsibility.
Where there’s a single BCE triggered on the death of the individual, the amount crystallised is calculated as at the date of the BCE, as is the amount of LTA the deceased individual has remaining.
In the case where multiple BCEs occur on the death of an individual, it’s likely that the date of the individual BCEs will be different. The amount crystallised under each BCE is still calculated by reference to the date of the BCE. However, the amount of LTA remaining is calculated immediately before the death of the individual. The reason for this is that where there’s more than one recipient, any arising LTA charge liability is allocated fairly between them. This is an issue where the individual has some available LTA at the point of death.
Silvester, aged 60, died 31 January 2020. His pension rights, all uncrystallised, consisted of a Group PP and a SIPP. The recipients of his pension rights are outlined in the following table:
Lump sum = uncrystallised funds lump sum death benefit (BCE 7)
Pension = beneficiary’s flexi-access drawdown (BCE 5C)
There are multiple relevant post-death BCEs, and for identifying LTA headroom all BCEs are treated as having occurred immediately before Silvester died. However, the crystallised amounts used to test against the LTA headroom aren’t determined as at the date of death, but at the dates of the BCEs i.e. the dates shown in the table.
Silvester had no form of LTA protection. The LTA headroom is therefore £1.055m (the standard lifetime allowance for 2019/20).
Total amount crystallised = £1,180,000
Chargeable amount = £1,180,000 – £1,055,000 = £125,000, which is apportioned as follows:
The chargeable amount for Silvester’s wife is made up of both lump sum amount and retained amount, and the LTA charge is therefore applicable at 55% and 25% respectively. The amounts crystallised under the respective BCEs are used to apportion the chargeable amount.
Where an LTA charge is generated under a relevant post-death BCE, the liability for the LTA charge falls on the recipient(s). With multiple recipients under multiple relevant post-death BCEs, the recipients are not jointly and severally liable for the entire amount of tax, only their proportionate share.
Irrespective of the number of relevant post-death BCEs on the death of an individual, the scheme administrator will distribute the fund without regard to any LTA charge that may potentially be due.
Where the personal representatives identify a chargeable amount, they must report this to HMRC, who then assesses the recipient(s). There’s no specific form that personal representatives should use to make their report to HMRC. The personal representatives should simply write to HMRC, giving the necessary details and HMRC will make the assessment(s) individually outside the self-assessment return.
Finally, it’s important to remember that liability for the LTA charge arises in the tax year in which the BCE occurs, so in the case of Silvester’s wife (our case study) it would be 2019/20 for BCE 7 and 2020/21 for BCE 5C.
This article first appeared on Money Marketing