Abolition of the LTA has resulted in need for clarification on the following areas and HMRC will be providing further detail in newsletters or workshops. In the meantime, the following information provides answers to some of the more frequently asked questions.
New Lifetime Limits
The two new lifetime limits that are going to be introduced are:
- – A ‘Lump Sum Allowance’ set at £268,275 – a quarter of the current £1,073,100 LTA. This is the maximum someone can take as a tax-free lump sum (unless they have protection)
- – A ‘Lump Sum and Death Benefit Allowance’ set at £1,073,100 – incorporating both tax-free lump sums someone takes while alive and lump sums paid on death.
Abolition of the LTA – Frequently Asked Questions
Question 1 — is available lump sum allowance required for small lump sums as well as the winding-up lump sum and trivial commutation lump sum after Abolition of the LTA ?
No. Available lump sum allowance will only be required for winding-up lump sums and trivial commutation lump sums. This is the effect achieved by the legislation published as part of Finance Bill 2023-24. Hmrc understand that the accompanying policy paper is not clear on this point and are looking at amending this.
Question 2 — where there is a requirement to have available lump sum allowance for a winding-up lump sum, or trivial commutation lump sum to be paid, does the available allowance need to cover the entirety of the payment after Abolition of the LTA ?
No. The individual only needs to have some available allowance.
Question 3 — can an Uncrystallised funds pension lump sum (UFPLS) now be paid to members aged over 75 after Abolition of the LTA ?
Yes. Because there is no test of pension savings against the new allowances at age 75, members will be able to be paid an UFPLS after age 75, provided the payment meets all other eligibility criteria.
Question 4 — will lump sum death benefits paid from dependents’, nominees’, or successors’ drawdown be tested against the beneficiaries’ lump sum and death benefit allowance after Abolition of the LTA ?
Question 5 — lump sum death benefits are excluded for the purposes of the tapered annual allowance, does this also apply to lump sums after Abolition of the LTA ?
No. The exclusion from the tapered annual allowance applies only to lump sum death benefits, and not to other taxable lump sums. This is because it is not the choice of the beneficiary to receive a lump sum death benefit.
Question 6 — are all lump sum death benefits paid from funds, which crystallised before 6 April 2024, free from income tax, or just the first payment of death benefits after Abolition of the LTA ?
Any lump sums paid from funds which crystallised before 6 April 2024 have been tested against the LTA, and therefore will be reflected by the transitional arrangements. Lump sum death benefits in this scenario will not be taxed again if paid after the commencement of this legislation.
Question 7 — if an individual has used 100% of their LTA, will the member have any remaining allowances and can they apply for a transitional tax-free amount certificate after Abolition of the LTA ?
Under the standard transitional arrangements, the member will not have any allowances left. This is because individuals who have used 100% of their LTA before 6 April 2024 cannot have expected to receive any further tax-free benefits, either as pension income or as lump sums.
If the member can provide complete evidence to demonstrate that they have used less than 100% of their LTA on tax-free amounts, the pension scheme which they apply to (see question 8) can review and determine if that member meets the required criteria for a transitional tax-free certificate. The scheme can then use the evidenced, transitional tax-free amounts to calculate the member’s remaining lump sum allowance and lump sum death benefit allowance.
Question 8 — when should a transitional tax-free certificate be applied for, and which benefits paid before 6 April 2024 should it reflect after Abolition of the LTA ?
We expect that the vast majority of individuals will go through the standard transitional calculation and not apply for a transitional tax-free certificate. A transitional tax-free certificate should only be applied for where individuals can provide complete evidence that they have received, as of 6 April 2024, a lower amount as tax-free lump sums than that provided for by the standard transitional calculation. Those who do apply for a transitional tax-free certificate must do so before their first relevant benefit crystallisation event (BCE) and they cannot apply more than once.
The application must be made by the member, and they must apply to the scheme from which the first lump sum is being paid post after 6 April 2024. The member must provide complete evidence to prove their exact tax-free amount received as lump sums, to receive the certificate. The certificate issued should reflect their remaining allowances across all schemes.
Question 9 — when a relevant benefit crystallisation event occurs and schemes are required to issue members with a statement, should this be a monetary amount or percentage and what should the figure be rounded to after Abolition of the LTA ?
The amounts which appears on an individual’s statement should be a monetary figure and not a percentage. The amount of their lump sum allowance and lump sum and death benefit allowance used should be to the nearest pound, rounded down.
Question 10 — can pension scheme administrators still use the P60 to report the amount of lump sum allowance and lump sum and death benefit allowance used to members after Abolition of the LTA ?
As with the LTA, there is no prescribed format for giving this statement to members, so providers can continue to use the P60 where appropriate. Any statements relating to the tax year 2024 to 2025 onwards should show an individual’s lump sum allowance, and lump sum and death benefit allowance used. However, statements issued in 2024 relating to the 2023 to 2024 tax year should still refer to the LTA.
How can MCL Accountants help with your queries on Abolition of the LTA ?
Contact MCL Accountants on 01702 593 029 if you would like us to answer your queries on the Abolition of the LTA or if you need any assistance with the preparation and submission of your business accounts or self-assessment tax returns to HMRC.
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Ishan provides financial management, taxation and transactional advice to business entities of all sizes. His expert areas include statutory compliance, business taxation, personal tax & transactional processing and systems. Industry sectors include professional services, retail, hospitality and entertaining & media and advertising services.