Life - Articles - Time to revisit excepted life assurance schemes


The Finance (no.3) Bill currently making its way through Parliament contains a brief but significant change to the tax treatment of premiums paid in respect of excepted life assurance schemes from 6 April 2019. For employers without such a scheme, the proposed change may make excepted life schemes simpler and more attractive.

 For existing schemes, employers may wish to review the scheme rules and any nomination forms to take advantage of the proposed change.
 What is an excepted life assurance scheme (ELAS)?
 An ELAS is an unregistered life assurance scheme, set up under a discretionary trust, which provides only lump sum benefits to a defined category of beneficiaries. The benefits under an ELAS are secured by a policy (usually an excepted group life policy) which meets certain prescribed conditions, and as a result those benefits receive favourable tax treatment.
  
 Importantly, because it is an unregistered scheme, membership of an ELAS does not breach the conditions relating to HMRC lifetime allowance protections (including fixed or enhanced protection) and any lump sum death benefit payable from the scheme falls outside of the lifetime allowance calculation. As such, these schemes are attractive for high earners as they allow continued provision of death benefits without incurring penal tax charges.
  
 What is changing?
 There has previously been a concern that the premium payable by the employer in respect of the member would be a taxable benefit in kind unless the benefit is payable only to “a member of the employee’s family or household” as defined in the relevant legislation (the Income Tax (Earnings and Pensions) Act 2003). However, the definition of this term is very restrictive, covering immediate family only, and excluding (for instance) siblings, unmarried partners and grandchildren, unless resident as guests in the same household or financially dependent.
  
 This concern has led some employers either to restrict the range of possible beneficiaries to the very narrow category defined in the legislation, or alternatively to decide not to put an ELAS in place at all.
  
 The Government announced at the Autumn Budget 2017 that it intended to amend and modernise the legislation so that this restriction no longer applies from April 2019, and the Finance (No.3) Bill contains the necessary changes. Once these amendments are in force, all that will be required for premiums to be exempt from income tax is that the death benefits under the policy are payable to an individual or a charity (unless premiums are paid in conjunction with a salary sacrifice arrangement, in which case specific rules apply). This aligns the tax rules regarding payment of premiums with the separate conditions applying to excepted group life policies more generally.
  
 Employers who have already established an ELAS should review the rules and check whether an amendment is required to take advantage of this new flexibility (as well as updating any member communications/nomination forms).
  
 Other key conditions
 There are various other conditions which an ELAS needs to meet to ensure it benefits from the intended tax treatment. One of these conditions is that the scheme must not be set up with the main purpose of avoiding tax. This is not a straightforward area, which often requires consideration of the scope of employees to whom the ELAS is intended to apply. Employers should consider taking bespoke legal advice on this area.
  
 Employers should also be aware of potential inheritance tax charges which could arise on the 10th anniversary of the ELAS by reference to the value of the trust assets (which would be relevant if the ELAS has undistributed insurance proceeds at the 10th anniversary or if one of the individuals covered by the policy at that date is terminally ill).
  
 To avoid such charges, we recommend that an ELAS should be closed down at regular intervals (we suggest every 8 years to allow a full 2 years for distribution of any benefits held within the scheme at that time), with a fresh scheme then being established.
  
 Employers should make sure they understand the process for achieving this within their scheme’s rules, and diarise the relevant anniversary date accordingly.
  

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