Can clients make a late application for lifetime allowance protection?

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Many advisers would be right in thinking once an application deadline has passed that’s the end of the story for protecting a member’s Lifetime Allowance. Although that may be correct, 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% or 55% arises. The allowance has fallen year-on-year and is currently £1,030,000 which is considerably lower than its 2011 predecessor of £1,800,000. Which means future-proofing a pension is more prudent than ever.

HMRC has introduced several different forms of protection over the years to shelter pension pots from a Lifetime Allowance tax charge. For Enhanced and Primary Protection, the deadline to apply was 5 April 2009. Nearly a decade later why is this still potentially relevant?

There may be circumstances when advisers take on new business or simply complete a client review. At which point an oversight might be discovered demonstrating an application was not made prior to the deadline. A discovery of this nature can be problematic but there may be opportunity to make a late application.

So, what are the scenarios where a late application for Enhanced or Primary Protection can still be made?

For HMRC to allow a late application 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 doesn’t believe there is a reasonable excuse or there has been an unreasonable delay. However, an appeal can be made to the First Tier Tribunal.

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

Twaite V HMRC

Mr Twaite suffered serious ill health during the period he should have applied for protection. He originally didn’t disclose the correct pension values to his adviser so protection wasn’t discussed but later when he did, the advice did not change. After the adviser left the firm, Mr Twaite’s affairs were reviewed by a new adviser who noticed protection was needed. The tribunal dismissed the late application for Enhanced Protection as Mr 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.

Tipping V HMRC

Mr 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. The tribunal allowed the late application for Enhanced Protection as they found Mr 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.

Jackson V HMRC

Mr Jackson’s adviser failed to submit the application. The error was only discovered when Mr Jackson requested to take benefits and realised no protection was held. The tribunal allowed the late application for Enhanced Protection because Mr 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.

The same cannot be said for later forms of protection, as these late applications are left to HMRC’s discretion. I hope that HMRC would apply its discretion consistently, but we are yet to see if this is the case.

Technical Consultant

Danielle spent four years working in the financial services industry prior to joining AJ Bell in 2012. Having built up a wealth of experience managing new business relationships for AJ Bell Youinvest, she moved into a technical role in 2017. Danielle is responsible for providing regulatory and technical analysis to the business, and is currently studying for CISI Wealth Management qualifications.