Last week, I looked at the conditions to be satisfied for a non-registered group life policy to be treated as an excepted group life policy. The benefits of satisfying the conditions are considerable.
Leaving aside inheritance tax, where exemption from the IHT relevant property regime is not available, the tax and National Insurance treatment for the employer and employee does not seem to be any less favourable than for a registered scheme and the registered scheme limits do not apply.
Provided a policy satisfies the excepted group life conditions, the tax position is as follows:
– Employer contributions – assessment on employees. There is no assessment on the employee by virtue of section 247 Finance Act 2004.
– Employer contributions – deductibility for the employer. The question of whether the employer will obtain a deduction of contributions for tax purposes will be decided by the local Inspector of Taxes under the “wholly and exclusively for the purposes of the trade” test.
– The tax treatment of benefits. As an excepted group life insurance scheme is not an employer-financed retirement benefits scheme (EFRBS), the benefits fall outside the general charge to income tax with the result that benefits arise tax-free.
– The tax treatment of the policy. As the scheme is based on an excepted group life policy, no chargeable event occurs on the death of the employee as an excepted group life policy is excluded from the chargeable events legislation by section 480 ITTOIA 2005.
– NICs on the employer. No liability to Class 1A NICs will arise as the employee will not be assessed to tax on the employer’s contributions.
– NICs on the employee. The benefit received by the employee is life cover which is a payment in kind and not subject to NICs.
– IHT. For a scheme established after April 5, 2006 under a trust other than a bare trust, the IHT discretionary trust regime will apply which could give rise to 10-yearly periodic charges and exit charges.
For a scheme in existence at April 5, 2006 to which section 151 IHT Act 1984 would have applied before April 6, 2006 – that is, the benefits arise free of IHT if distributed at the discretion of the scheme trustees/administrator within the two years following the member’s death – only a proportion of the fund is protected from IHT under section 151, paragraph 57 Sch 36 Finance Act 2004. The protected proportion is defined as ACV/V x 100, where V is the market value of the scheme at the relevant time and ACV is, broadly, the value of the scheme on April 5, 2006. If the group life scheme does not acquire any surrender value, which seems likely, ACV in the equation is nil, which means all the benefit is potentially subject to IHT.
In practice, both for preand post-April 2006 policies, it is unlikely that a 10-yearly charge will arise on the basis that the policy is unlikely to have any value at that time. This being the case, any exit charge after the first 10-year anniversary will be at a nil rate.
On an exit within the first 10 years, for example, following the death of a member, there will be some value in the trust but here there will be no tax charge as the value of the policy when the settlement was created would have been nil.
There are two types of non-excepted group life insurance schemes:
– Relevant life policies which are not excepted group life policies.
These are policies which would be excepted group life policies but for the inclusion of benefits which relate to ill-health, disablement or death by accident during service. They are taxed as for an excepted group life scheme except that there will be no exclusion from the chargeable event regime in respect of any death benefits payable.
– Group life policies that are not relevant life policies (EFRBS).
Next week, I will look at group policies that are treated as EFRBS.