Neil MacGillivray unpicks the lessons of a case that shows not all payments of lump sum death benefits to a charity necessarily qualify as 'charity lump sum death benefits'
I had an enquiry lately where the member of a self-invested personal pension died in his late 70s. He had a substantial pension fund but had left no nomination and had no family. In his will he left his estate to a charity and, based on this, the scheme trustees made the decision to pay the lump sum death benefit to the same charity. The charity initially thought the lump sum would be tax-free but was about to find out the tax implications were far from straight forward.
In order for the death benefit to qualify as a ‘charity lump sum death benefit' (CLSDB), and therefore be paid tax free, the current requirements are:
* There are no dependents of the member;
* The member had relevant uncrystallised funds under a money purchase arrangement when they died or it is paid in respect of either the member's drawdown pension fund or flexi-access drawdown pension fund at the date of the member's death; and
* It is paid to a charity nominated by the member.
Although the payment met the first two conditions, it failed on the third as there was no nomination by the member. The outcome was that as, the member had been aged over 75 at the time of his death, the lump sum would be taxable.
Charities are structured as either companies or trusts so, as non-qualifying persons, a special lump sum death benefit charge at the rate of 45% would apply. If paid to a company structure there is no provision in the legislation to reclaim the tax paid. This is because the liability to the charge falls on the scheme administrator, and the lump sum is not treated as income of the recipient for any purpose of the Tax Acts.
The recipient is also not liable for the special lump sum death benefit tax charge so, if they are a non-taxpayer, they cannot make any repayment claim in respect of the tax paid. There is, however, a possible exception to this if the charity is structured as a trust, which was the case with this particular enquiry.
As with the company structure, a charitable trust cannot reclaim the CLSDB directly - though there may be an opportunity for the beneficiary of a trust to reclaim the tax.
Section 206(8) of the Finance Act 2004 states that, where the tax is charged on a payment to a person in the person's capacity as a trustee of a settlement, and onward payment is subsequently made out of the settlement to a beneficiary who is an individual, then the gross payment is taxable as the beneficiary's income.
Since April 2016, the beneficiary can deduct the special lump sum death benefits charge from their total tax liability for the year and, if tax is overpaid, they can reclaim the overpayment.
Matter of fact
HMRC has said it will be a matter of fact whether the taxable lump sum death benefit is paid to a person in their capacity as trustee, and whether the payment is subsequently made out of a settlement to a beneficiary of the settlement, who is an individual.
So, in principle, it would appear possible, but it will very much depend on the terms of the charitable trust and the nature of the payment to the individual. Before going down this route, the charity should take specialist advice.
One thing that is clear from this case is that not all payments of lump sum death benefits to a charity are ‘charity lump sum death benefits' and, if a member wishes to consider leaving their death benefits to a charity, it is essential the three key requirements are met. Failure to do so will prove costly.
Neil MacGillivray is head of technical support at James Hay
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