tax liability on LSDBA for multiple payouts & beneficiaries

Magus266

A relative died recently at age 55 and left two pensions, both of which count toward the LSDBA. He had 100% of his allowance available when he died. Individually the lump sum death benefits are each below the LSDBA, combined they breach the limit. Each lump sum was paid to a different beneficiary. The first was paid out in September 2024. The second was only paid out in May 2025, eight months later and in a new tax year. I know that tax at the beneficiary's nominal rate of tax will be due on the amount which breaches the LSDBA, but I can't work out which of the two beneficiaries is liable.

Common sense suggests that the fairest answer is that both beneficiaries pay a portion based on the percentage of the total they received, e.g. pension 1 pays out 1 million pounds to beneficiary A, pension 2 pays out half a million to beneficiary B, so A pays two thirds of the tax due, whilst B pays one third. This is fine if both benefits are paid at the same time. However, I've been digging around and some of the information I've found seems to suggest that the dates the benefits are paid out makes a difference - i.e. The first payout attracts no tax as it is below the LSDBA. The second payout breaches the LSDBA and, because it was paid out later, all of the tax due on the amount breaching the allowance falls on the recipient of the second payout.

I can't seem to find a definitive answer. Can anyone help?

Thanks.

dunstonh

The ideal scenario with DC is to use beneficiary drawdown, as that avoids LSDBA. They can then draw it from the beneficiary drawdown tax-free without LSDBA. It's a quirk of the rules that taking the lump sum directly goes against LSDBA but taking the lump sum via beneficiary drawdown avoids the LSDBA test.

I assume it is not from DC schemes, or they didn't do that if it was (either chose not to or couldn't)?

Anyway, the answer to your question is that when the legal personal representative completes the Lump Sum Death Benefit Charge Notification Form, they list all schemes, amounts and beneficiaries. HMRC will apply it pro rata across all beneficiaries. Whether it is one scheme or multiple, it doesn't matter.

i.e. HMRC calculates the chargeable excess over the deceased’s LSDBA and raises an assessment for each beneficiary, based on the excess attributable to the lump sums that particular beneficiary has received and their own marginal rate. In effect, the excess is spread across beneficiaries in line with what each has actually received overall, rather than per‑scheme.

Dead_keen

https://forums.moneysavingexpert.com/discussion/6653159/tax-liability-on-lsdba-for-multiple-payouts-beneficiaries

Getting geeky, the actual lump sum death benefits are paid on different days but tax legislation treats both of them to have been made immediately before death. Interested people can ask their favourite LLM an s637T(2) ITEPA 2003. So that means the ordering of the actual payments does not matter.

Then there is a question of how much of the LSDBA is used against each actual lump sum death benefit. The is pro rated as @dunstonh says. This is given by s637T(3) ITEPA 2003.

So in your case, each beneficiary gets a bit of the LSDBA and each pays tax on their bit of the excess.