RPSM11105520 - Technical Pages: Lifetime allowance: Where the lifetime allowance used up: Liability when the member is dead: More than one relevant lump sum death benefit is paid

Liability for the lifetime allowance charge where more than one relevant lump sum death benefit is paid

When more than one relevant lump sum death benefit is paid following the death of a member the date of crystallisation through each BCE 7 is still taken as the date of payment of the relevant lump sum benefit. 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 this is to ensure that where more than one relevant lump sum death benefit is paid 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. Here the chargeable amount arising through the BCE 7 crystallisations will be less than the total amount actually paid out as lump sum death benefits.

Where those lump sum payments were paid to more than one recipient the lifetime allowance charge liability of each recipient is apportioned 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 the appropriate portion of the total amount of tax payable. The recipients are not jointly and severally liable for the entire amount of tax.

Where more than one lump sum death benefit is paid to the same person from different arrangements/schemes there is no issue with apportionment (as the whole charge falls on that one recipient).

RPSM11105530 gives an example.

The above does not mean that the amount crystallised through BCE 7 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 level of lump sum death benefits that were actually paid.

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. A relevant lump sum death benefit is defined in the legislation for the purposes of the lifetime allowance. Since the payment of the lump sum is not a BCE 7, as the only BCE that can occur after age 75 is a BCE 3 (see RPSM11102070), the lump sum is not a relevant lump sum death benefit.

Such lump sums are instead liable to the special lump sum death benefits charge at the rate of 55% under section 206 Finance Act 2004. Tax is charged on the amount of the lump sum paid or, if the rules of the pension scheme permit the scheme administrator to deduct the tax before payment, on the amount of the lump sum before deduction of tax. The scheme administrator is the person liable to the special lump sum death benefits charge whether or not they and the person being paid the lump sum are resident, ordinarily resident or domiciled in the United Kingdom. For more information on BCE 7 see RPSM11104800 and on the special lump sum death benefits charge see RPSM04101110.

The lump sum is not treated as income for any purpose of the Tax Acts.