What Is an Excepted Group Life Assurance Arrangement?
An excepted group life assurance arrangement is a death benefits arrangement that is not registered with HM Revenue & Customs (HMRC). It has only been available in its current form since 6 April 2006. The arrangement comprises (1) a trust and (2) an excepted group life policy. The trustees of the trust will hold the excepted group life policy under a discretionary trust, in order that any death benefits may be paid by the trustees free from inheritance tax (although, note that the arrangement itself is not entirely free from the risk of incurring inheritance tax see below for more on this). There is no formal process available for seeking HMRC approval of an excepted group life arrangement it is, therefore, important that appropriate advice is taken to ensure the arrangement meets all of the necessary criteria.
Why Are Excepted Group Life Assurance Arrangements Becoming More Popular?
Any payments made under an excepted group life assurance arrangement fall outside of a person's lifetime allowance. The lifetime allowance has reduced significantly since the 2011/12 tax year, when it was 1,800,000. Since 6 April 2018, the lifetime allowance has been 1,030,000. For some employees, it would not take an exceptionally large death benefit from a registered pension plan to push them over their lifetime allowance. Employers have, therefore, started to consider alternative methods of rewarding employees. Benefits payable from an excepted group life assurance arrangement do not impact upon a person's fixed protection for lifetime allowance purposes, which makes such arrangements a particularly attractive means of rewarding high earners.
Is an Excepted Group Life Arrangement a "No-Brainer"?
While excepted group life assurance arrangements can provide a suitable means of reward for those employees who are nearing their lifetime allowance, they can have their pitfalls if appropriate advice is not taken.
First, if the trust holds "relevant property" at certain measurement times, an inheritance tax charge may arise. In the case of an excepted group life assurance arrangement, a tax charge could potentially arise:
a.When the insurance policy first becomes a trust asset
b.On the 10 year anniversary of the trust
c.When death benefits become payable by the trustees
A tax charge is unlikely to arise when the excepted group life policy first becomes a trust asset, because the policy is usually treated by HMRC as having a nominal value only.
A 10-year anniversary charge will apply if there is value in the trust on each 10th anniversary of the trust being established. There will be value in the trust if the policy has paid out death benefits and those benefits have not yet been distributed. It is possible that there would also be value in the trust if the policy covers an employee who is terminally ill on a 10th anniversary.
A tax charge will only arise on the payment of a death benefit if a tax charge arose at either the commencement of the trust (which is unlikely) or at the 10-year anniversary immediately prior to payment of the benefit.
Second, one of the conditions of an excepted group life policy is that tax avoidance must not be one of its main purposes. Many employers will establish an excepted group life assurance arrangement in order to benefit employees who might otherwise be impacted by a lifetime allowance charge. There is the possibility, therefore, that HMRC might, in the future, decide such an arrangement is for the purpose of tax avoidance. When advising clients in relation to these types of arrangements, we will often seek advance clearance from HMRC.
Where Do I Locate the Tax Rules Relating to an Excepted Group Life Assurance Arrangement?
Relevant legislation is not located in one place and it is necessary to consider each element of tax law. Much of the legislation surrounding excepted group life assurance arrangements relates to the conditions attaching to the excepted group life policy, rather than to the actual trust. Because the trust is not a pension plan, inheritance tax legislation relating to trusts holding "relevant property" will also apply (see above). This area is complex and we recommend taking appropriate advice.
Some Practical Points
Where Can I Find Further Information?
HRMC’s Insurance Policyholder Taxation Manual covers excepted group life assurance arrangements. We would also be happy to provide you with advice and can supply the trust instrument.