IHTM17092 - Pensions: excepted group life policies: Inheritance Tax treatment

Before 6 April 2006 an excepted group life policy was a sponsored superannuation scheme, so the property held in these trusts was not relevant property for Inheritance Tax purposes and no ten-year anniversary or exit charges arose. From 6 April 2006, these trusts are relevant property trusts (subject to the transitional provisions for property in a trust that was established before that date) (IHTM17039).

The value of an exit charge is calculated on the basis of the policy proceeds actually paid out to the beneficiaries. However, because these are term assurance polices, the value of the policy at the date when it was settled into trust will be usually very small. So any distributions due to the death of an employee within the first ten years are likely to be taxed at 0%.

Where the policy may have a substantive value when settled is where one of the people whose life is covered by the policy is terminally ill when the policy is taken out, in which case it is possible that a subsequent exit charge may be taxed at greater than 0%.

The ten-year anniversary charge will only produce tax if there was a value in the trust at that time. The value in the trust would normally be nil, apart from the following two circumstances:

• if a death had occurred before that ten-year anniversary charge and the proceeds had not yet been distributed by the trustees
• if the policy covered the life of an employee who was terminally ill at the ten-year anniversary date.

Technical will liaise with the Actuarial Team on the question of any value in an excepted group life policy where the state of health of the employee is a factor in that valuation.

If the charge at the previous ten-year anniversary is nil, an exit charge for property leaving the trust between ten-year anniversaries will also be nil.

As the trustees have discretion over the payment of the death benefits, these are not treated as within the scheme member’s estate.