The group risk industry body is asking the Office of Tax Simplification (OTS) to push for an exemption from the potential charges where the sole asset of a discretionary trust is an EGLP.
Grid is also calling for the removal of the requirement that all members of an EGLP have the same benefit calculation and the alignment of the potential beneficiary classes for EGLPs and benefit-in-kind rules.
There are 782,674 people in EGLPs, across 7,130 schemes, according to latest industry figures.
Employers have faced increased complexity since the introduction of pension simplification in 2006, which has been exacerbated by the reduction in the lifetime allowance to £1m. For many years prior to this, the most straightforward way to offer GLA was to use a discretionary trust written under pensions legislation. However, the introduction of the Lifetime Allowance (LTA) in 2006 meant that an individual’s pension and GLA cover would be added together and tested against the LTA. Individuals already close to or above the LTA would be hit with a tax charge in the event of death if their combined benefits written under pension legislation exceeded the LTA, which was £1.75m when introduced, but which currently stands at £1m.
Where GLA payments to beneficiaries are paid through an EGLP set up under a discretionary trust they do not create a potential liability for breaching the LTA. Furthermore they do not form part of the deceased’s estate so can be paid quickly, without the need for probate, and free from inheritance tax (IHT). These advantages have fuelled a significant increase in take-up of EGLP by employers.
However, EGLPs can have drawbacks – the discretionary trusts holding them are subject to possible entry, exit and periodic charges and can be complex to administer. As a consequence, employers have to pay for expertise in setting them up and monitoring them.
There have been no conclusive court cases to date determining the tax position of EGLPs.
Grid also says that it can be extremely difficult for executors to accurately complete IHT forms if an EGLP benefit has been paid as it falls between the available reporting forms and the executor is unlikely to know how the policy was arranged in any case.
Grid argues thatthe cost of administering the reporting and collection of taxes far exceeds the amount collected. Government figures show that the amount collected each year is no more than £1m. Yet, annually, the cost of administration is estimated to be £1.75m, to which can be added the cost of legal and technical advice. This figure is estimated to be close to £24m, paid over a number of years.
Grid says reducing compliance, legal and administrative costs in this area will both save employers money as well as encourage more SMEs and other businesses to provide cover for their employees. SMEs may well be put off of doing so because of the perceived cost, yet this sector often has the most need to provide GLA. Many SMEs are family-run businesses, and when employees die unexpectedly they often fund expenses from their own pocket. Providing death-in-service benefits helps protect them as well as their staff, the organisation points out.
The OTS has called for evidence and experiences about perceptions of Inheritance Tax. Grid has responded, laying out the benefits of GLA, and in particular EGLPs, for employers, employees and society as a whole.
By providing quick financial support to dependants, the death benefit supports the aim of building resilient households and may lessen any potential call on state support. As these products are provided in an employment context, cover is frequently provided for many employees without medical evidence so that it is inclusive for those with some health problems who may not be accepted for a personal policy or only with an extra charge, says Grid. For many people, particularly low- to middle-earners, this can be the only protection cover they have and ensures that they or their families do not fall back on the State.
Grid spokesperson Katharine Moxham says: “Group Life Assurance is a very popular benefit. It’s often one of the first protection benefits that employers offer their staff: it’s easy to understand, and provides a tangible financial benefit. The last thing we want is to put off employers from offering it, or add to their costs for doing so. We want to make it easier for employers to look after their staff, this has a direct benefit to Government so we hope they take our recommendations on board.”
