Last week, I considered the changing role of life insurers and, in the context of protection, looked at the often overlooked group risk market. Perhaps not surprisingly, I considered the registered group life scheme first.
Both before and after A-Day, the registered scheme was and is the first type of scheme to consider. It is highly tax attractive in that the contributions paid by the employer will usually be deductible and non-assessable on the employee.
There will also be no adverse National Insurance implications.
There is also the not inconsiderable benefit of benefits being paid free of inheritance tax under the discretionary trust regime but not usually subject to the rigours of the discretionary trust regime and all that it implies in connection with entry, periodic and exit charges. To secure this attractive IHT benefit, it would be necessary for the member to have no power to dispose of the death benefits and the death benefits would broadly need to be distributed from the trust within two years of the member’s death.
In practice, neither of these conditions should prove terribly difficult to satisfy. The concept of the non-binding nomination has worked pretty well for a number of years now and benefits are usually distributed fairly soon after a member’s death.
Why would anyone want to consider a non-registered scheme?
Well, some may not like the tax fundamentals of a registered scheme that I set out last week. In considering the tax treatment of non-registered group life schemes, the types can be split broadly into two:
– Excepted group life schemes, which are taken out of the chargeable event legislation andl Non-excepted group life schemes.
Before the new simplified pension tax regime became operative on April 6, 2006, the above split applied but with the schemes being styled unapproved rather than non-registered. Unapproved schemes in place at April 5, 2006 can choose to become registered or carry on as they are and be known as non-registered schemes.
I will consider the tax treatment of these under the following headings:
– Employer contributions – assessment on the employee.
– Employer contributions – deductibility for the employer.
– Tax treatment of benefits.
– Tax treatment of policy.
– NICs on the employer.
– NICs on the employee.
– Inheritance tax.
In what follows, the references are to a company and its employees. However, the points made apply equally to a sole proprietor and his employees and a partnership/limited liability partnership and its employees.
An excepted group life policy (defined as a relevant life policy), which includes benefits which relate to ill-health, disablement or death by accident during service, while not being an excepted group life policy, will be a relevant life policy and so not treated as an employer-financed retirement benefits scheme. I will consider how an EFRBS is taxed in a later article.
An excepted group life scheme is one that satisfies the seven conditions set out in sections 481 and 482 ITTOIA 2005. These conditions are:
– A capital sum only must be payable on the death of each life assured before a specified age not greater than 75. If there is any exclusion, such as death by suicide, the exclusion must apply to each life assured.
– The benefit payable on each death must be calculated on the same basis and any limitations applied uniformly.
– Any surrender value under a policy cannot exceed the premium referable to the unexpired risk under the policy. This rule enables a refund of premium to be made on cancellation.
– Only the sums and benefits under the first and third conditions can be paid or conferred under the policy.
– Any benefits may only be paid to, or applied on behalf of, an individual or charity beneficially entitled to them.
– No benefit can be paid, directly or indirectly, to a life assured, or a person connected to a life assured, on the death of another life assured.
– Tax avoidance must not be the main purpose or one of the main purposes of the insurance.
Provided a policy satisfies the above conditions, the tax and NIC position is extremely favourable and I will look at this next week.