Finance Act 2004

Lifetime allowance charge

214Lifetime allowance charge

(1)A charge to income tax, to be known as the lifetime allowance charge, arises where—

(a)a benefit crystallisation event occurs in relation to an individual who is a member of one or more registered pension schemes, and

(b)either the first lifetime allowance charge condition or the second lifetime allowance charge condition is met.

(2)The first lifetime allowance charge condition is that—

(a)the whole or any part of the individual’s lifetime allowance is available on the benefit crystallisation event, but

(b)the amount crystallised by the benefit crystallisation event exceeds the amount of the individual’s lifetime allowance which is available on the benefit crystallisation event.

(3)The second lifetime allowance charge condition is that none of the individual’s lifetime allowance is available on the benefit crystallisation event.

(4)The following sections make further provision about the lifetime allowance charge—

• section 215 (amount of charge),

• section 216 and Schedule 32 (benefit crystallisation events and amounts crystallised),

• section 217 (persons liable to charge),

• section 218 (individual’s lifetime allowance and standard lifetime allowance),

• section 219 (availability of individual’s lifetime allowance), and

• sections 220 to 226 (lifetime allowance enhancement factors).

(5)In sections 215 to 219—

(a)references to “the individual”, in relation to the lifetime allowance charge, are to the individual in relation to whom the benefit crystallisation event giving rise to the charge occurs, and

(b)references to “the pension scheme”, in relation to the lifetime allowance charge, are to the pension scheme to which the benefit crystallisation event giving rise to the charge, or the amount crystallised by it, relates.

(6)Schedule 36 contains (in Part 2) transitional provision about the lifetime allowance charge.

215Amount of charge

(1)The lifetime allowance charge is a charge in respect of the chargeable amount.

(2)The lifetime allowance charge is a charge—

(a)at the rate of 55% in respect of so much (if any) of the chargeable amount as constitutes the lump-sum amount, and

(b)at the rate of 25% in respect of so much (if any) of the chargeable amount as constitutes the retained amount.

(3)The “chargeable amount” is the aggregate of—

(a)the basic amount, and

(b)any amount which is treated as forming part of the lump-sum amount under subsection (6) or of the retained amount under subsection (8).

(4)The “basic amount”—

(a)if the first lifetime allowance condition is met, is the amount by which the amount crystallised by the benefit crystallisation event exceeds the amount of the individual’s lifetime allowance available on it, and

(b)if the second lifetime allowance charge condition is met, is the amount crystallised by the benefit crystallisation event.

(5)The “lump-sum amount” is the aggregate of—

(a)so much of the basic amount as is paid as a lump sum to the individual or a lump sum death benefit in respect of the individual, and

(b)any amount which is treated as forming part of the lump-sum amount under subsection (6).

(6)If and to the extent that the tax payable under this section on any of the lump-sum amount is covered by a scheme-funded tax payment, it is to be treated as itself forming part of the lump-sum amount.

(7)The “retained amount” is the aggregate of—

(a)so much of the basic amount as is not paid as a lump sum to the individual or a lump sum death benefit in respect of the individual, and

(b)any amount which is treated as forming part of the retained amount under subsection (8).

(8)If and to the extent that the tax payable under this section on any of the retained amount is covered by a scheme-funded tax payment, it is to be treated as itself forming part of the retained amount.

(9)An amount of tax payable under this section is “covered by a scheme-funded tax payment” if—

(a)the tax is paid by the scheme administrator, and

(b)the individual’s rights under the pension scheme are not reduced so as fully to reflect the amount of the payment of tax.

(10)Whether the individual’s rights under the pension scheme are reduced so as fully to reflect the amount of the payment of tax is to be determined in accordance with normal actuarial practice.

(11)The chargeable amount is not to be treated as income for any purpose of the Tax Acts.

216Benefit crystallisation events and amounts crystallised

(1)This table sets out—

(a)the events which are benefit crystallisation events in relation to the individual, and

(b)the amount which is crystallised by each of those events.

(2)Schedule 32 gives the meaning of expressions used in the table in subsection (1).

217Persons liable to charge

(1)The persons liable to the lifetime allowance charge are—

(a)the individual, and

(b)the scheme administrator of the pension scheme,

and their liability is joint and several.

(2)But where the liability arises by reason of the payment of a relevant lump sum death benefit it is a liability of the person to whom the lump sum death benefit is paid.

(3)Subsection (4) applies if—

(a)more than one relevant lump sum death benefit is paid in respect of an individual, and

(b)tax is not chargeable on the whole amount of all of them.

(4)In that case each of the persons to whom any of the relevant lump sum death benefits is paid is liable under subsection (2) to such portion of the total amount of the tax payable by reason of their having been paid as appears to the Inland Revenue to be just and reasonable.

(5)A person is liable to the lifetime allowance charge whether or not—

(a)that person,

(b)any other person who is liable to the lifetime allowance charge, and

(c)the scheme administrator (if not so liable),

are resident, ordinarily resident or domiciled in the United Kingdom.

218Individual’s lifetime allowance and standard lifetime allowance

(1)Subject as follows, the individual’s lifetime allowance is the standard lifetime allowance.

(2)The standard lifetime allowance for the tax year 2006-07 is £1,500,000.

(3)The standard lifetime allowance for each subsequent tax year is such amount, not being less than the standard lifetime allowance for the immediately preceding tax year, as is specified by order made by the Treasury.

(4)Where one or more lifetime allowance enhancement factors operate in relation to a benefit crystallisation event occurring in relation to the individual, the individual’s lifetime allowance at the time of the benefit crystallisation event is—

(5)The following make provision for the operation of lifetime allowance enhancement factors—

• section 220 (pension credits from previously crystallised rights),

• sections 221 to 223 (individuals who are not always relevant UK individuals),

• sections 224 to 226 (transfers from recognised overseas pension schemes),

• paragraphs 7 to 11 of Schedule 36 (primary protection), and

• paragraph 18 of that Schedule (pre-commencement pension credits).

(6)Paragraph 19 of that Schedule makes provision for the reduction of what would otherwise be the individual’s lifetime allowance in certain cases where the individual is permitted to take pension before normal minimum pension age.

(7)In this Part references (however expressed) to a person’s lifetime allowance at any time are to what would be the person’s lifetime allowance, calculated in accordance with this section, if a benefit crystallisation event occurred in relation to the person at that time.

219Availability of individual’s lifetime allowance

(1)This section is about the availability of the individual’s lifetime allowance on the occurrence of a benefit crystallisation event in relation to the individual (“the current benefit crystallisation event”).

(2)If no benefit crystallisation event has occurred in relation to the individual before the current benefit crystallisation event, the whole of the individual’s lifetime allowance is available on the current benefit crystallisation event.

(3)If one or more benefit crystallisation events have occurred in relation to the individual before the current benefit crystallisation event—

(a)in a case in which the previously-used amount is equal to or greater than the amount of the individual’s lifetime allowance, none of the individual’s lifetime allowance is available on the current benefit crystallisation event, and

(b)in any other case, so much of the individual’s lifetime allowance as is left after deducting the previously-used amount is available on the current benefit crystallisation event.

(4)The previously-used amount is—

(a)where one benefit crystallisation event has occurred in relation to the individual before the current benefit crystallisation event, the amount crystallised by the previous benefit crystallisation event as adjusted under subsection (5), or

(b)where two or more benefit crystallisation events have occurred in relation to the individual before the current benefit crystallisation event, the aggregate of the amounts crystallised by each previous benefit crystallisation event as adjusted under subsection (5).

(5)The adjustment of the amount crystallised by a previous benefit crystallisation event referred to in subsection (4)(a) and (b) is the multiplication of that amount by—

(6)Where more than one benefit crystallisation event occurs in relation to an individual on the same day, it is for the individual to decide the order in which they are to be treated as occurring for the purposes of this section; but this subsection is subject to section 166(2) (entitlement to pension commencement lump sum to arise immediately before entitlement to associated pension).

(7)Where more than one benefit crystallisation event occurs by reason of the payment of lump sum death benefits in respect of an individual the benefit crystallisation events are to be treated for the purposes of this section as occurring immediately before the individual’s death.

(8)Paragraph 20 of Schedule 36 makes provision affecting this section in relation to pre-commencement pensions.

(9)In this Part references (however expressed) to the portion of a person’s lifetime allowance that is available at any time are to the portion of the person’s lifetime allowance that would be available, calculated in accordance with this section, if a benefit crystallisation event occurred in relation to the person at that time.

220Pension credits from previously crystallised rights

(1)This section makes provision for the operation of a lifetime allowance enhancement factor with respect to a benefit crystallisation event occurring in relation to an individual where—

(a)the individual has (at any time after 5th April 2006 but before the benefit crystallisation event) acquired rights under a registered pension scheme by reason of having become entitled to a pension credit,

(b)the pension credit derived from the same or another registered pension scheme, and

(c)the rights under that registered pension scheme which became subject to the corresponding pension debit consisted of or included rights to a post-commencement pension in payment.

(2)“Post-commencement pension in payment” means a pension to which a person became (actually) entitled on or after 6th April 2006.

(3)The lifetime allowance enhancement factor is the pension credit factor.

(4)The pension credit factor is—

(5)This section only applies if notice of intention to rely on it is given to the Inland Revenue in accordance with regulations made by the Board of Inland Revenue.

221Non-residence: general

(1)This section makes provision for the operation of a lifetime allowance enhancement factor with respect to a benefit crystallisation event occurring in relation to an individual where, during any part of the period that is the active membership period in relation to an arrangement relating to the individual under a registered pension scheme, the individual is a relevant overseas individual.

(2)Section 222 provides the lifetime allowance enhancement factor in the case of an arrangement that is a money purchase arrangement; and section 223 provides the lifetime allowance enhancement factor in the case of any other arrangement.

(3)For the purposes of this Part an individual is a relevant overseas individual at any time if, at that time, the individual either is not a relevant UK individual or—

(a)is a relevant UK individual only by virtue of paragraph (c) of section 189(1) (individuals resident in UK at some time in previous five tax years), and

(b)is not employed by a person resident in the United Kingdom.

(4)In this section and sections 222 and 223 “the active membership period”, in relation to a benefit crystallisation event occurring in relation to an arrangement relating to the individual, is the period—

(a)beginning with the date on which the benefits first began to accrue to or in respect of the individual under the arrangement or, if later, 6th April 2006, and

(b)ending immediately before the benefit crystallisation event.

(5)But if benefits ceased to accrue to or in respect of the individual under the arrangement before the benefit crystallisation event, the active membership period is to be treated as having ended then.

(6)This section only applies if notice of intention to rely on it is given to the Inland Revenue in accordance with regulations made by the Board of Inland Revenue.

222Non-residence: money purchase arrangements

(1)This section applies in the case of an arrangement that is a money purchase arrangement.

(2)The lifetime allowance enhancement factor is—

(a)if the arrangement is a cash balance arrangement, the cash balance arrangement non-residence factor (see subsections (3) to (5)), and

(b)if the arrangement is any other sort of money purchase arrangement, the other money purchase arrangement non-residence factor (see subsections (6) and (7)).

(3)The cash balance arrangement non-residence factor is—

(a)the factor arrived at by the application of subsection (4) in relation to the part of the active membership period during which the individual was a relevant overseas individual, or

(b)if there have been two or more parts of that period during which the individual was a relevant overseas individual, the aggregate of the factors arrived at by the application of subsection (4) in relation to each of those parts of that period.

(4)The factor arrived at by the application of this subsection in relation to any part of the active membership period is—

(5)For the purposes of subsection (4)—

(a)the closing value of the individual’s rights under the arrangement is the amount which would, on the valuation assumptions (see section 277), be available for the provision of benefits to or in respect of the individual under the arrangement if the individual became entitled to the benefits at the end of that part of that period, and

(b)the opening value of the individual’s rights under the arrangement is the amount which would, on the valuation assumptions, be available for the provision of benefits to or in respect of the individual under the arrangement if the individual became entitled to the benefits at the beginning of that part of that period.

(6)The other money purchase arrangement non-residence factor is—

(a)the factor arrived at by the application of subsection (7) in relation to the part of the active membership period during which the individual was a relevant overseas individual, or

(b)if there have been two or more parts of that period during which the individual was a relevant overseas individual, the aggregate of the factors arrived at by the application of subsection (7) in relation to each of those parts of that period.

(7)The factor arrived at by the application of this subsection in relation to any part of the active membership period is—

223Non-residence: other arrangements

(1)This section applies in the case of an arrangement that is not a money purchase arrangement.

(2)The lifetime allowance enhancement factor is—

(a)if the arrangement is a defined benefits arrangement, the defined benefits arrangement non-residence factor (see subsections (3) and (4)), and

(b)if the arrangement is a hybrid arrangement, the hybrid arrangement non-residence factor (see subsections (5) to (7)).

(3)The defined benefits arrangement non-residence factor is—

(a)the factor arrived at by the application of subsection (4) in relation to the part of the active membership period during which the individual was a relevant overseas individual, or

(b)if there have been two or more parts of that period during which the individual was a relevant overseas individual, the aggregate of the factors arrived at by the application of subsection (4) in relation to each of those parts of that period.

(4)The factor arrived at by the application of this subsection in relation to any part of the active membership period is—

(5)The hybrid arrangement non-residence factor is the greater or greatest of such of—

(a)what would be the cash balance arrangement non-residence factor (under section 222) if the arrangement were a cash balance arrangement,

(b)what would be the other money purchase arrangement non-residence factor (under that section) if the arrangement were any other sort of money purchase arrangement, and

(c)what would be the defined benefits arrangement non-residence factor (under subsections (3) and (4)) if the arrangement were a defined benefits arrangement,

as are relevant factors in relation to the arrangement.

(6)A factor is a relevant factor in relation to a hybrid arrangement if, in any circumstances, the benefits that may be provided to or in respect of the individual under the arrangement may be benefits linked to that factor.

(7)For that purpose—

(a)cash balance benefits are linked to the cash balance arrangement non-residence factor,

(b)other money purchase benefits are linked to the other money purchase arrangement non-residence factor, and

(c)defined benefits are linked to the defined benefits arrangement non-residence factor.

224Transfers from recognised overseas pension scheme: general

(1)This section makes provision for the operation of a lifetime allowance enhancement factor with respect to a benefit crystallisation event occurring in relation to an individual where (at any time after 5th April 2006 but before the benefit crystallisation event) there has been a recognised overseas scheme transfer.

(2)There is a “recognised overseas scheme transfer” if any sums or assets—

(a)held for the purposes of an arrangement under a recognised overseas pension scheme, or

(b)representing accrued rights under such an arrangement,

are transferred so as to become held for the purposes of, or to represent rights under, an arrangement under a registered pension scheme relating to the individual.

(3)The arrangement specified in subsection (2)(a) or (b) is referred to in this section and sections 225 and 226 as the “recognised overseas scheme arrangement”.

(4)The lifetime allowance enhancement factor is the recognised overseas scheme transfer factor.

(5)The recognised overseas scheme transfer factor is—

(6)Section 225 specifies the relevant relievable amount in the case of a recognised overseas scheme arrangement that was a money purchase arrangement; and section 226 specifies the relevant relievable amount in the case of an recognised overseas scheme arrangement that was any other sort of arrangement.

(7)In this section and sections 225 and 226 “overseas arrangement active membership period” is the period—

(a)beginning with the date on which the benefits first began to accrue to or in respect of the individual under the recognised overseas scheme arrangement or, if later, 6th April 2006, and

(b)ending immediately before the recognised overseas scheme transfer.

(8)But if benefits ceased to accrue to or in respect of the individual under the recognised overseas scheme arrangement before the recognised overseas scheme transfer, the overseas arrangement active membership period is to be treated as having ended then.

(9)This section only applies if notice of intention to rely on it is given to the Inland Revenue in accordance with regulations made by the Board of Inland Revenue.

225Overseas scheme transfers: money purchase arrangements

(1)This section applies in the case of a recognised overseas scheme arrangement that was a money purchase arrangement.

(2)The relevant relievable amount is—

(a)if the recognised overseas scheme arrangement was a cash balance arrangement, the cash balance relevant relievable amount (see subsections (3) to (5)), and

(b)if the recognised overseas scheme arrangement was any other sort of money purchase arrangement, the other money purchase relevant relievable amount (see subsections (6) and (7)).

(3)The cash balance relevant relievable amount is—

(a)the amount arrived at by the application of subsection (4) in relation to the part of the overseas arrangement active membership period during which the individual was not a relevant overseas individual, or

(b)if there have been two or more parts of that period during which the individual was not a relevant overseas individual, the aggregate of the amounts arrived at by the application of subsection (4) in relation to each of those parts of that period.

(4)The amount arrived at by the application of this subsection in relation to any part of the overseas arrangement active membership period is—

(5)For the purposes of subsection (4)—

(a)the closing value of the individual’s rights under the recognised overseas scheme arrangement is the amount which would, on the valuation assumptions (see section 277), be available for the provision of benefits to or in respect of the individual under the arrangement if the individual became entitled to the benefits at the end of that part of that period, and

(b)the opening value of the individual’s rights under the arrangement is the amount which would, on the valuation assumptions, be available for the provision of benefits to or in respect of the individual under the arrangement if the individual became entitled to the benefits at the beginning of that part of that period.

(6)The other money purchase relevant relievable amount is—

(a)the amount arrived at by the application of subsection (7) in relation to the part of the overseas arrangement active membership period during which the individual was not a relevant overseas individual, or

(b)if there have been two or more parts of that period during which the individual was not a relevant overseas individual, the aggregate of the amounts arrived at by the application of subsection (7) in relation to each of those parts of that period.

(7)The amount arrived at by the application of this subsection in relation to any part of the overseas arrangement active membership period is the amount of the contributions made under the arrangement by or in respect of the individual in any part of the overseas arrangement active membership period during which the individual was not a relevant overseas individual.

226Overseas scheme transfers: other arrangements

(1)This section applies in the case of a recognised overseas scheme arrangement that was not a money purchase arrangement.

(2)The relevant relievable amount is—

(a)if the recognised overseas scheme arrangement was a defined benefits arrangement, the defined benefits relevant relievable amount (see subsections (3) and (4)), and

(b)if the recognised overseas scheme arrangement was a hybrid arrangement, the hybrid relevant relievable amount (see subsections (5) to (7)).

(3)The defined benefits relevant relievable amount is—

(a)the amount arrived at by the application of subsection (4) in relation to the part of the overseas arrangement active membership period during which the individual was not a relevant overseas individual, or

(b)if there have been two or more parts of that period during which the individual was not a relevant overseas individual, the aggregate of the amounts arrived at by the application of subsection (4) in relation to each of those parts of that period.

(4)The amount arrived at by the application of this subsection in relation to any part of the overseas arrangement active membership period is—

(5)The hybrid relevant relievable amount is the greater or greatest of such of—

(a)what would be the cash balance relevant relievable amount (under section 225) if the recognised overseas scheme arrangement had been a cash balance arrangement,

(b)what would be the other money purchase relevant relievable amount (under that section) if that arrangement had been any other sort of money purchase arrangement, and

(c)what would be the defined benefits relevant relievable amount (under subsections (3) and (4)) if that arrangement had been a defined benefits arrangement,

as are relevant to that arrangement.

(6)An amount is relevant to a hybrid arrangement if, in any circumstances, the benefits that may be provided to or in respect of the individual under the arrangement may be benefits linked to that amount.

(7)For that purpose—

(a)cash balance benefits are linked to the cash balance relevant relievable amount,

(b)other money purchase benefits are linked to the other money purchase relevant relievable amount, and

(c)defined benefits are linked to the defined benefits relevant relievable amount.