HMRC U-turns on lifetime allowance death payments change

The tax authority told Pensions Expert’s sister publication FTAdviser that the current process for dealing with death benefits will be kept for the time being.

On March 27, HMRC published its LTA guidance newsletter following the Budget in which chancellor Jeremy Hunt abolished the LTA.

We have listened to the concerns expressed by pension providers. Having spoken with the industry, we have decided to maintain the current process for dealing with death benefits.

HMRC

In the paper, HMRC said the changes announced in the Budget mean lump sum payments from pensions on death that would have been subject to a LTA excess charge will instead be liable for income tax at the recipient’s marginal rate from April 6 2023.

Schemes were advised that they would need to first contact the legal personal representative of the deceased member to find out how much available LTA the member has, telling them the type and amount of the benefit to be paid.

This would enable schemes to determine whether the deceased member’s LTA had been used up and whether any of the benefit should be subject to tax at the beneficiaries’ marginal rate.

But HMRC said that many representatives from across the industry have since raised concerns around this new process for the taxation of death benefits.

In a message sent to the pensions industry, seen by FTAdviser, the tax authority said a strong preference had been expressed for maintenance of the current system. 

Under this process, a pension provider would pay out pension death benefits without accounting for the LTA tax charge. 

The legal personal representative – which could, for example, be the beneficiary or a solicitor — would be responsible for collating information about the payments made to beneficiaries, including any amount above the deceased member’s available LTA. 

This would be disclosed to HMRC generally within the later of 13 months of the member’s death or 30 days of the date they realised that an LTA charge applied.

An HMRC spokesperson said: “We have listened to the concerns expressed by pension providers. Having spoken with the industry, we have decided to maintain the current process for dealing with death benefits. 

“This will continue until we have worked through the longer-term position for the full abolition of the LTA from April 6 2024.”

HMRC said further information will continue to be provided in LTA-specific pension scheme newsletters.

Quilter previously raised concerns that the changes HMRC proposed placed the onus on the beneficiaries or solicitors to determine and relay the apportionment of a tax charge to the pension provider, and then the provider was required to deduct the tax from the excess above the LTA prior to making the payment.

This could have caused complications and delay pension death benefit payments, Quilter head of retirement planning Jon Greer.

This article originally appeared on FTAdviser.com