Ron Wheatcroft, technical manager at Swiss Re, commented: “Pure protection life assurance policy benefits are only payable upon death or disability and otherwise present no cash value, so it makes very little sense for them to be included in the RPT regime.
“We believe that exempting trusts where the only assets come from within these policies would be an extremely useful measure – one that would be at almost no cost to the Exchequer. Below are five reasons why.”
1. Individual life assurance policies in trust
“Policy ownership and clarity over beneficiaries is fundamental to life insurance, but there are other ways to secure policy ownership of personal policies without including them in the Regime. For example using Life of Another or including a beneficiary nomination within the policy.”
2. Group life policies
“At the end of 2020, there were 11,993 non-pension Excepted Group Life Policies (EGLP) in force covering more than 1.4m members. The frozen Lifetime Allowance for pensions up to 2026 is likely to result in more interest in EGLPs to underpin death benefit arrangements.
“The RPT rules pose particular difficulties for trustees of EGLPs, as the additional complexity and financial consequences may deter smaller employers from providing the simplest of protection cover for their workforce.
“Workplace life assurance cover is entirely voluntary and so, without action, a knock-on effect could be employees and their families becoming less resilient.”
3. Terminal illness
“Under RPT rules, a liability can occur if a life assured happens to be terminally-ill on the exact day that any ten-year periodic charge falls due. This is not easy to establish, particularly where death occurred up to 12 months after that date where it is understood that HMRC would expect trustees to check retrospectively whether the person had been terminally-ill.
“In such circumstances, doctors may decline to give a diagnosis meaning that, in practice, establishing a tax liability is largely a matter of chance.
“It's hard to believe that the law intended to cover the deaths of people differently, simply because they have the misfortune to have been terminally-ill on a specific day, but in practice this is currently the case.”
4. Distributing the proceeds
“Issues can arise where the trustees have received proceeds but may still be establishing how best to distribute them – for example, if an Expression of Wish form was not updated. In this instance, Trustees should be allowed the time to ensure policy benefits are distributed appropriately, rather than being constrained by a potential tax liability on a specific assessment date.
“Further savings could be made if the "common benefit formula" requirement for all members to establish an EGLP was removed.
Any possible tax avoidance is covered elsewhere in the Eligibility Conditions.”
5. Addressing the growing gap
“Overall, the gap between the cost of administration and tax generated increases as more policies are placed into trust. The maximum amount of tax revenue is currently less than £1m.
“For EGLPs alone, our research shows that the annual cost of complying with completing returns is around £3m. This assumes each trust holds three policies to comply with the common benefit formula requirement. The cost of additional specialist advice from lawyers and employee benefit consultants, incurred over a number of years, is estimated to be £40m.
“An exemption would be totally in the spirit of HMRC's statement in responding to its consultation on trust tax simplification in 2014.”
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