The popularity of excepted group life trusts (EGLTs) has increased in recent years, especially for those individuals who have applied for lifetime allowance protection and cannot have "relevant benefit accrual" under a registered pension scheme or where the employer offers high multiples of salary as a lump sum death benefit.
EGLTs have a number of advantages, including potentially being as tax efficient as registered pension schemes but with no registration and reporting requirements with HMRC.
However, currently premiums paid by employers in respect of EGLTs are only exempt from being a taxable benefit in kind if the beneficiaries under the trust fall within a narrow definition of "family or household". If the beneficiary is not a member of the employee's family or household, the premiums paid by the employer are treated as a taxable benefit in kind. This could potentially result in it not being possible to pay a lump sum death benefit to a beneficiary under an EGLT, with undistributed assets then remaining in the trust at its termination date (without the ability to pay these to a payee of last resort, such as a charity).
In practice this has meant that employers are sometimes reluctant to use an EGLT as an alternative to a registered pension scheme for all their staff, choosing instead to limit membership to those affected by the lifetime allowance.
Draft changes proposed in the Finance Bill 2018/19 will expand the benefit in kind exemption from 6 April 2019 so that it will be possible to pay a benefit to any individual or registered charity under an EGLT without the premium payable by the employer being taxed as a benefit in kind.
We anticipate that this change could result in an increased use of EGLTs by employers for all of their staff. Those employers who have already put in place EGLTs for high earners only may wish to revisit whether they expand the membership of the EGLT to all eligible staff.
When designing a package of benefits for its workforce, an employer may choose to provide death benefits as part of a workplace pension scheme or alternatively through a separate standalone life assurance scheme.
Standalone life assurance schemes typically take the form of a trust, with one or more life assurance policies being held as assets of the trust.
It is possible to set up standalone life assurance schemes which are registered with HMRC and some employers may choose to do so if they are looking to remove the death benefits payable under their workplace pension scheme and offer them to all employees through a separate registered vehicle instead. However, benefits under a registered life assurance scheme will count towards an employee's lifetime allowance.
To prevent tax charges arising, many employers are offering unregistered life assurance arrangements, such as EGLTs, whether across the workforce as a whole or just to those high earners who are most affected by the lifetime allowance.
This has become increasingly popular following the Government's gradual reduction of the lifetime allowance over recent years. Those individuals who have applied for lifetime allowance protection cannot have "relevant benefit accrual" under a registered pension scheme and as such an EGLT is a valid way of providing them with a lump sum death benefit without individuals losing protection. Similarly, EGLTs can be popular where employers offer a high multiple of salary as a lump sum death benefit.
An EGLT currently offers the advantage of favourable tax treatment as well as being outside the scope of the lifetime allowance. For example, income tax is not charged on the lump sum benefit paid to a recipient from the policy and, provided the trustee of the scheme has a discretion over who receives a benefit on the member's death and the scheme is properly set up, no inheritance tax should generally be chargeable.
Current limitations with EGLTs
Whether premiums paid by the employer to an EGLT are treated as a taxable benefit in kind has always been less clear. The stance taken by HMRC to date has been that, in order to qualify for the income tax exemption, death benefits payable from an EGLT can only be paid to an employee's "family or household" as defined in the tax legislation (namely a spouse or civil partner, children (and the spouse or civil partners of those children), parents, dependants, domestic staff or, somewhat unusually, guests).
Therefore if the recipient of the lump sum death benefit is a charity, or someone nominated by the employee on an expression of wish form who does not fall within the definition of "family or household" (such as a sibling), an income tax charge may be triggered. This is more restrictive than the permitted recipients under a registered life assurance scheme and has historically raised questions for employers as to how widely they should use an EGLT (some choosing to limit their use to high earners only).
Fortunately the Government is now consulting on amendments to the tax legislation which will correct this anomaly with effect from 6 April 2019. As a result, it is proposed that EGLTs will be able to pay death benefits to any individual or registered charity without the premiums being taxable on employees as a benefit in kind.
This will effectively remove the discrepancy between registered pension schemes and EGLTs in terms of the categories of potential beneficiaries who can receive a lump sum death benefit in a tax-efficient manner. This should make EGLTs a more attractive option for employers looking to introduce standalone life assurance arrangements as part of their employee benefit packages.