Other considerations will need to be factored into any decision to change the group life cover offered, but this article summarises key tax issues employers would need to work through when considering any alternative options.
Death in service cover under registered group life plans
A registered group life plan is, in fact, a registered pension scheme. It operates either as part of the main scheme that provides employees’ pensions, or separately as a ‘stand-alone’ death benefits scheme.
Employees nominate beneficiaries to be considered for a lump sum payment in the event of their deaths, and any benefits provided by the plan trustee are on a discretionary basis.
In summary, any death in service benefit will be tax free for the beneficiaries if:
- The employee’s Lump Sum and Death Benefit Allowance (LSDBA) is not exceeded (the standard LSDBA is currently £1,073,100, but individuals with relevant pension protections could have a higher personal limit – although individuals who had already started to take benefits from their pension schemes could have a lower personal limit; and
- The employee dies before reaching 75 years of age.
In other circumstances, any death in service benefit under a registered group life plan will be subject to income tax on the beneficiary at their marginal rate but is currently outside the employee’s estate for IHT purposes.
However, on and after 6 April 2027 most unused pension funds and death benefits will be brought within the scope of a person’s taxable estate, meaning they could be subject to inheritance tax (IHT) at 40 percent. Any such IHT charges would be in addition to any income tax payable were the LSDBA to be exceeded or were the employee to die after reaching 75 years of age.
It is not entirely clear from HMRC’s recent technical consultation on these IHT changes whether employer provided death in service cover under a registered group life plan will also be included in the employee’s estate for IHT purposes in all/certain circumstances, but that possibility cannot currently be excluded.
However, even if death in service benefits under a registered group life plan remain outside the scope of IHT from 6 April 2027, by ‘using up’ some or all of the deceased employee’s LSDBA, they can increase the amount of the pension pot, net of IHT, that is subject to income tax in beneficiaries’ hands.
Death in service cover under an excepted group life plan
An excepted group life plan operates like a registered group life plan in that covered employees nominate their beneficiaries, and any death in service benefits provided by the plan trustee are discretionary.
However, specific legislation provides that any death benefit paid under an excepted group life plan should be exempt from income tax in the employees’ hands regardless of whether the employee’s LSDBA has been exceeded. Additionally, it currently seems clear that death in service benefits provided under an excepted group life plan will (subject to the limited exceptions which currently apply) remain outside the scope of IHT on and after 6 April 2027 and, as they do not count toward an employee’s LSDBA, they should not increase any part of the employee’s remaining pension pot that is subject to income tax in the beneficiaries’ hands.
What should employers consider
Employers who currently provide death in service cover under a registered group life plan should consider whether, given its potential to maximise the financial support for employees’ dependants at a difficult time, it would be appropriate to move to an excepted group life plan.
However, notwithstanding the potential financial benefits for employees’ dependants, excepted group life plans are subject to certain conditions and limitations that require careful consideration. These include:
- To qualify as an EGLP, which is used to provide cover under an excepted group life plan, an insurance policy must meet certain conditions, including that benefits are calculated in the same way for all covered employees, so it might be necessary for an excepted group life plan to hold more than one EGLP to provide different levels of cover, which could increase costs;
- Additionally, an EGLP cannot have tax avoidance as a ‘main purpose’, though it is hard to see how this could normally be the case as the legislation expressly provides for EGLPs and therefore offers them as a choice when providing employee group life cover – however, tax advice should be taken based on the precise characteristics of the employee population and overall reward offering for death in service benefits to confirm the position;
- Unlike registered group life plan trusts, excepted group life plan trusts could, in certain circumstances, potentially be subject to special (lifetime) IHT charges e.g. on the 10-year anniversary of the trust creation. However, normally these would either be small or prevented from arising altogether;
- The employer should confirm whether the cost of the EGLP premiums would be deductible when calculating its taxable profits;
- Sacrificing salary or bonus in return for increased levels of life cover could potentially complicate matters (e.g. the optional remuneration arrangement benefit in kind rules could result in payment of the EGLP premiums triggering income tax and NIC charges, although these may sometimes be relatively small); and
- If life cover is provided for the employee’s spouse/partner under an excepted group life plan, the tax treatment of EGLP premiums and any eventual post-death payments should be carefully reviewed and advice taken to ensure the outcome is as expected.
How KPMG can help
An excepted group life plan using EGLPs is a potentially attractive way to provide group life cover to employees, notwithstanding the potential for additional administration and associated costs. However, care should be taken to ensure that the arrangements are in line with a group’s broader remuneration objectives. The underlying insurance policies will also need to satisfy the conditions to be EGLPs, and any residual adverse tax consequences (e.g., any potential IHT charges for the trustee) will also need to be identified, considered, and managed.
Please contact the authors or your usual KPMG in the UK contact if you would like to discuss group life plans further.
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