Excepted Group Life Policy schemes

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Typically, most employers who provide death in service benefits for employees do so through a scheme that is registered with HMRC.

However, in recent years, there has been an increase in the number of employers using an alternative type of arrangement: an Excepted Group Life Policy. Changes which have been proposed to take effect from 6 April 2019 could make such arrangements even more common in the future.

What is an Excepted Group Life Policy (EGLP)?

An EGLP is a life assurance policy for death in service benefits. EGLPs are set up under discretionary trusts with benefits paid to certain categories of beneficiary in the event of an employee’s death. There are certain conditions that must be met for an arrangement to qualify as an EGLP but registration with HMRC is not a requirement.

Why are EGLPs used?

The use of EGLPs began to increase as the lifetime allowance (LTA) was decreased from 2010 onwards. There are four key benefits when using an EGLP:

  1. Benefits paid from an EGLP are outside of the LTA regime and are therefore not subject to LTA tax charges. This makes EGLPs an attractive choice for employees whose savings in HMRC-registered pension schemes are close to (or above) the LTA threshold. Joining an EGLP does not invalidate any LTA protection that has already been claimed from HMRC.
  2. Providing that the trustee of the policy has discretion over who receives the death benefit, the recipient of the lump sum is not liable to pay income tax on the benefits.
  3. As the benefit is paid directly to the beneficiary, this falls outside of the employee’s estate for inheritance tax purposes.
  4. The registration and reporting requirements that exist for HMRC-registered schemes do not apply to EGLPs.

The current position

Currently, premiums paid by employers towards retirement or death benefits are only exempt from being a taxable benefit in kind if the ultimate beneficiary is a member of the employee’s “family or household”.

This has a narrow legal definition and includes the employee’s:

  • spouse/civil partner;
  • children and their spouses/civil partners;
  • parents;
  • family members;
  • dependants;
  • domestic staff; and
  • guests (section 721 of the Income Tax (Earnings and Pensions) Act 2003).

If the beneficiary does not fall within this definition, the premiums paid by the employer are treated as a taxable benefit in kind.

The proposed changes

The Finance Bill 2018/19 (the Bill) proposes to extend the benefit in kind exemption to make it possible to pay a benefit to any individual or charity under an EGLP without the premium payable by the employer being taxed as a benefit in kind. The changes are proposed to take effect from 6 April 2019.

A key point to consider

In many cases, EGLPs are only used for senior employees who are affected by the LTA threshold. However, if the proposed changes make it through to the final act of Parliament, the much wider category of eligible beneficiaries could result in EGLPs being set up by more employers as an alternative to an HMRC-registered scheme.

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