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Can clients make a late application for lifetime allowance protection?

Deadline-Clock-Alarm-700.jpgMany believe a client’s lifetime allowance can no longer be protected once a deadline has passed. But there are circumstances where a late application can still be made.

If benefits are crystallised in excess of the lifetime allowance, a tax charge of 25 per cent or 55 per cent arises. The allowance has fallen year on year and is currently £1.03m, considerably lower than its 2011 predecessor of £1.8m. With this in mind, future proofing a pension is more prudent than ever.

HM Revenue & Customs has introduced several different forms of protection over the years to shelter pots from a lifetime allowance tax charge.

For Enhanced and Primary Protection, the deadline to apply was 5 April 2009. So, why is this potentially still relevant a decade later? Because there are scenarios where a late application can still be made.

Tom Selby: What next for DB pension transfers?

For HMRC to allow it, the individual must be able to satisfy two limbs of a statutory test set out in the Registered Pension Schemes (Enhanced Lifetime Allowance) Regulations 2006.

  • Limb 1: “Reasonable excuse”

The first test is whether an individual has a reasonable excuse for not having applied for protection by the relevant deadlines. If this test cannot be satisfied then a late application fails at the first hurdle, and must be dismissed.

HMRC accepts as a matter of principle that a taxpayer’s reliance on a specialist can amount to a reasonable excuse, although such reliance cannot be used in each and every case. Instead, the circumstances must be weighed up individually.

  • Limb 2: “Reasonable delay”

Additionally, an individual must notify HMRC about the late submission without unreasonable delay after the “reasonable excuse” has ceased to be relevant.

HMRC may refuse to consider a late application for Enhanced or Primary Protection if it does not believe there is a reasonable excuse or there has been an unreasonable delay. However, an appeal can be made to the First Tier Tribunal.

Case studies

Three recent tribunal cases illustrate how the test is applied in practice:

1. Twaite V HMRC

Twaite suffered serious ill health during the period he should have applied for protection. He originally did not disclose the correct pension values to his adviser so protection was not discussed but later, when he did, the advice did not change.

After the adviser left the firm, Twaite’s affairs were reviewed by a new adviser who noticed protection was needed. The tribunal dismissed the late application for Enhanced Protection as Twaite did not satisfy limb 2 of the statutory test. They thought a delay of 11 months after he found out he needed protection was not acceptable.

2. Tipping V HMRC

Tipping had substantial pension funds held with a number of providers. After taking early retirement he directed a large contribution into his pension. His adviser provided general notes on protection but did not recommend or make the application.

Neil MacGillivray: Identifying the lifetime allowance headroom

The tribunal allowed the late application for Enhanced Protection as they found Tipping to have reasonable excuse after putting full trust into his adviser who provided poor advice and also caused the reason for the delay in submission.

3. Jackson V HMRC

Jackson’s adviser failed to submit the application. The error was only discovered when Jackson requested to take benefits and realised no protection was held. The tribunal allowed the late application for Enhanced Protection because Jackson put his full trust into his adviser who made a human error by not submitting the application correctly.

It is worth noting all three cases relate to the late application of Enhanced Protection. The same rules apply to Primary Protection but the same cannot be said for later forms of protection, as these late applications are left to HMRCs discretion. I hope HMRC would apply its discretion consistently but we are yet to see if this is the case.

Danielle Byrne is technical resources consultant at AJ Bell

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