Focus on the structure of your Excepted Group Life scheme now to avoid potential problems in the future, writes Graham Yearsley, Head of Risk & Healthcare, Gallagher.

Excepted Group Life schemes are still trending. But their popularity has always come with an edge of uncertainty. As the market grows, it’s worth going back to basics. Take a look at the structure. Getting that right can give you and your employees much peace of mind.

An increasing number of employers are shifting all their employees from Registered to Excepted Group Life schemes. And who can blame them? With all the talk of the potential impact of the ever-shrinking Lifetime

Allowance (LTA), it’s not surprising that employers want to help protect the pension and lump-sum death benefits of those currently – or likely in future – impacted.

All-employee Excepted Group Life schemes tend to be viewed as a catch-all solution, helping employers guard against any accusations of tax avoidance by just lumping everyone together: whether the LTA is relevant to all employees or not.

There has been a 150% rise in the number of schemes since 2013.

Source: Swiss Re Life & Health GroupWatch 2018

Why? Because HMRC states that the scheme must not be set up with the main purpose of avoiding tax.

Whilst there’s some merit to all-employee arrangements, care should be taken to ensure they’re structured correctly. For example, you don’t always have to move everyone into the scheme just to prove that it’s not tax avoidance.

Plus, it’s worth bearing in mind that all-employee arrangements hugely increase the risk of an Inheritance Tax (IHT) hit on the 10th anniversary of the scheme, or when a latent value is created: this can occur when an insured employee is diagnosed with a terminal illness.

Once a tax charge is created, the whole scheme moving forward will be subject to additional tax charges.

Break the cycle

Advice on how to mitigate potential 10th anniversary issues abounds, most of it confusing and contradictory.

It should be simple. Start by considering writing the Trust Deed in perpetuity. Then, if you have an employee in the scheme with a terminal illness, remove them from the scheme prior to the 10th anniversary and set them up in an individual trust. The tax charge due would then apply to the individual trust only.

In this way, you’re not avoiding any tax. You’re simply ensuring it remains contained and relevant.

What’s new?

New legislation, due to be implemented on 6 April 2019, will remove the current restriction that says premiums paid by the employer into an Excepted Group Life scheme are taxable as a benefit in kind unless the benefit is payable to immediate family only.

In order to reflect modern life and ensure benefits are payable to unmarried partners, siblings or grandchildren, employers have always simply accepted the potential of it being treated as a P11d benefit for tax purposes.

If you have an existing scheme, you may wish to review the scheme rules and any nomination forms to take advantage of the proposed change.

“Once a tax charge is created, the whole scheme moving forward will be subject to additional tax charges” Graham Yearsley, Gallagher

Excepted Group Life schemes - What you should be asking yourself:

  • Are you willing to accept the possibility of a tax charge at the 10th anniversary? (a possibility that increases hugely if you have all your employees in the scheme)
  • Do you fully understand the potential benefits and downsides? And clearly communicate these to employees?
  • If employees can buy themselves extra life cover via the scheme as part of Flex, do you inform them about the potential tax liability before they buy?
  • Before moving everyone into the scheme and closing your Registered arrangement, have you considered giving employees a choice?
  • Have you ensured advice, endorsement and sign-off of the scheme structure by a specialist tax lawyer and an employee benefits consultant?

Want to know more? To find out more, please get in touch with your usual Gallagher representative or call +44 20 7204 8981