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A legal firm seeks advice on its group life scheme in light of the Budget changes to inheritance tax and trusts

We are a small legal partnership. What advice can you offer about our group life scheme for the partners?

The new pension rules, along with the proposed changes in the inheritance tax treatment of trusts, have made such policies difficult to deal with. Approved group schemes are now registered schemes but old unapproved ones need some action.

The insurance is not keyperson insurance – it is personal – so the premiums have not been claimed as a business expense. There should be no risk of a tax charge arising for the firm although this should be clarified with the inspector of taxes.

The next question concerns the chargeable-event rules There is a risk that should more than one partner die, there might well be a charge.

The current rules for unapproved schemes are potentially unattractive. Registering the scheme would cause a problem with the lifetime allowance because of the sums assured. So we need to look at whether or not the scheme can be treated as “excepted” under the Finance Act 2003.

There are seven tests for treatment as an unapproved excepted group life policy and the partners’ scheme seems to satisfy them all.

  • The policy must provide a capital sum payable on death before 75.
  • The same method for calculation of the sum assured and any restrictions must be applied to all the lives insured.
  • The policy must not provide a surrender value other than a refund of unused premiums.
  • The policy can only provide these death benefits.
  • Benefits payable under the policy must be paid either to an individual entitled to them (or a charity) or a trustee for payment to individuals. This effectively excludes companies although partnerships are OK.
  • No person whose life is insured under the policy may receive any death benefit in respect of another group member.
  • The policy must not taken out with the main purpose of avoiding the payment of tax.

I would suggest that you approach your inspector of taxes to get clarification as to whether or not the scheme can be an excepted one. It is also then important to consider whether or not there should be a trust in place. One attraction of having one is that death benefits do not form part of the deceased partner’s estate for IHT purposes. This is not necessarily such a big deal where the partner is married and the widow will be inheriting the whole estate, including the sum assured. Clearly, if the wife were to predecease the partner, there could be a problem, however.

For most people, perhaps the more useful benefit of a trust is that a claim can be settled more quickly where there are trustees than if probate has to be granted.

The main effect of the proposed changes to the IHT rules on trusts is to make most transfers into trust chargeable transfers as opposed to potentially exempt transfers. This was the case with interest in possession or accumulation and maintenance trusts, which will now, with few exceptions, be taxed as discretionary ones.

We will now have to think about charges on the establishment of the trust, periodic charges and exit charges, which can be quite onerous even if there is no tax to pay.

The proposed rule changes should not affect this firm because group schemes will generally be written under a discretionary trust anyway. It would be impractical to give any direct benefit to specific individuals – which is what separates other types of trust from discretionary ones – because of the numbers of potential beneficiaries involved. It is necessary, therefore, for the trustees to have discretion over who they pay benefits to although the members can nominate beneficiaries.

However, after A-Day, there are new IHT implications. It would seem that there are no specific IHT benefits where group schemes are excepted. Previously, death benefits from unapproved schemes did not give rise to an IHT charge, which is still the case with registered group death-in-service schemes.

Clarification is being sought from HM Revenue & Customs as to exactly what the IHT position is. Initially, it seems that one will have to observe carefully all the different elements of IHT for discretionary trusts.

The first thing is to explore the excepted scheme route with the inspector of taxes to deal with the potential income tax problems and then to consider further the trust arrangement in the light of developing legislation.


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