Who may benefit from a Transitional Tax-Free Amount Certificate?

Under the standard transitional calculation both the lump sum allowance (LSA) and lump sum and death benefit allowance (LSDBA) are usually reduced by 25% of the lifetime allowance used.   

 

However, HMRC also provided the option to apply for a Transitional Tax-Free Amount Certificate (TTFAC).  This allows lump sums previously taken to be assessed under the new rules as a monetary amount rather than the standard transitional calculations.

 

Who may apply?

The legislation and HMRC guidance states that anyone can apply provided they have an LTA percentage used. This will be everyone who experienced a benefit crystallisation event from 6^th April 2006 to 5^th April 2024.

 

This rules-out those who only took benefits before 6^th April 2006 because those benefits won’t have been tested against the LTA.

 

It also rules out those who haven’t crystallised any benefits, however, there would be no benefit in applying anyway.

 

It is possible to apply even where the member has used 100% of their LTA.

 

Clients must apply for their TTFAC before their first post 6 April 2024 relevant benefit crystallisation event.  If not, the opportunity is lost and the standard transitional calculation method will apply.

 

 

Who may benefit from applying for a TTFAC?

 

The key potential beneficiaries are those who have or are likely to have funds with a total value in excess of £1,073,100 or their own protected higher lifetime allowance and any of the following.

 

• Took benefits between 6 April 2006 and 5 April 2024 without their full tax-free cash entitlement.
• Took benefits during tax years 2016/17 – 2019/20, ie when the lifetime allowance was less than £1,073,100, without any lifetime allowance protection.
• Reached age 75 before 6 April 2024 with uncrystallised funds and have not since taken their tax-free cash entitlement. This is because the new rules don’t ignore the age 75 LTA tests that would have applied to their uncrystallised funds.
• Transferred funds to QROPS
• Took benefits that contained a disqualifying pension credit
• Took benefits that contained a GMP which restricted their cash to less than 25%

 

There is also an oddity in the legislation where the client has used 100% of the LTA and taken their full tax-free cash entitlement. Under the standard transitional calculation they won’t be entitled to any LSA or LSDBA without a certificate.

 

However, if they apply for the TTFAC, even where they won’t benefit from further LSA, they will usually benefit by obtaining some LSDBA to use against lump sum benefits paid on death or in serious ill health.

 

 

Who will not benefit?

 

• Anyone who has no uncrystallised funds on 6^th April 2024 and does not plan to make any further contributions.
• Anyone that only took benefits when the LTA was £1,073,100 ie from 6 April 2020 onwards and took their full entitlement to tax free cash from those crystallisations each time. This is because the standard calculation will mirror what has happened and as such no benefit will be gained from applying for a certificate. (Unless 100% of lifetime allowance has been used - see above)
• Anyone that took benefits when the LTA was higher than £1,073,100 ie between 6 April 2006 and 5 April 2016 or with higher LTA protection and took their full entitlement to tax free cash from those crystallisations each time.
• Anyone where their LSA and LSDBA calculated on the standard basis will give plenty of headroom against the availability of future benefits. This is of course a judgement call based on their age, fund value and plans in the future.