By way of background, an Excepted Group Life Policy (“EGLP”) is a death benefits arrangement that is not registered with HM Revenue & Customs (HMRC). It provides lump sum death in service benefits free of tax up to an insured level that are not subject to the lifetime allowance (the “LTA”) even if they exceed an individual’s LTA.
The LTA was introduced by the Finance Act 2004. It places a cap on the amount of pension saving that an individual can build up over their life that benefits from tax relief. The LTA charge (currently 55% for lump sums) is applied to all registered scheme benefits above the LTA. For the tax year 2022/23, the LTA is set at £1,073,100. The government has announced that the LTA will remain frozen at this level until April 2026.
Certain “benefit crystallisation events” (i.e. an event which results in the payment of certain benefits) will result in part of an individual’s LTA being used up. Payment of a lump sum death benefit upon the death of an individual can be one of these benefit crystallisation events (depending on the circumstances).
Benefits payable from an EGLP do not impact upon a person’s fixed protection for LTA purposes, which makes such arrangements a particularly attractive option for high earners.
An EGLP must meet specific statutory conditions covering the nature of the benefits under the policy and the persons intended to benefit, as described below (s.480 and s.481 of the Income Tax (Trading and Other Income) Act 2005) (“ITTOIA“).
Conditions applying to benefits under an EGLP
To qualify as an EGLP, the benefits provided under the policy must satisfy the following conditions:
- it can only pay lump sum benefits for deaths before age 75;
- benefits must be worked out in the same way for all insured people;
- if the policy is cancelled, it must not have a cash value. However, it can refund unused premiums; and
- only the benefits set out in the policy can be paid.
Conditions applying to persons intended to benefit under an EGLP
The individuals insured under the policy must satisfy the following conditions:
- benefits can only be paid to:
- individuals;
- charities; and
- trusts set up for individuals;
- benefits cannot be paid to another person also covered by the policy. However, benefits can be paid if that other insured person is a dependant or relative of the person who died; and
- the policy must not be set up with the main purpose of avoiding tax.
Is an EGLP a “no brainer”?
EGLPs can provide a suitable means of reward for those employees who are over or nearing the LTA, however they can have their pitfalls if appropriate advice is not taken. As well as ensuring that the statutory conditions of ITTOIA are met, care should be taken in relation to the following:
- an inheritance tax charge may arise if the EGLP is treated as forming part of the deceased’s estate; and
- tax avoidance must not be the main purpose for any of the holders or beneficiaries of the policy underpinning the EGLP. Many employers will establish an EGLP in order to benefit employees who might otherwise be impacted by the LTA. There is therefore the possibility that HMRC might, in the future decide such an arrangement is for the purpose of tax avoidance.
What are the pros and cons of an EGLP vs a Registered Life Assurance scheme?
Below is a table of how an EGLP under the compares against a Registered Life Assurance arrangements for the purposes of providing death in service lump sum benefits.
Green text indicates where using an EGLP is more advantageous / flexible, whereas red text indicates where using an EGLP is less advantageous / flexible.
| The Registered life assurance scheme | an EGLP |
| Lump-sum death benefits may be paid tax free up to the LTA, with the excess subject to the LTA | Lump-sum death benefits are not subject to the LTA and may be paid tax free up to the level insured, provided the statutory conditions are met. |
| Multiple calculation bases may be used in offering lump-sum death benefits to members | Lump-sum death benefits must be calculated using a single calculation basis per policy |
| Lump-sum death benefits are usually paid in accordance with trustee discretion | Lump-sum death benefits must be paid to an individual or charity (or applied at the trustees’ direction) – this is slightly more prescriptive |
| Dependants’ pensions may be paid in addition to lump-sum death benefits (and these do not count towards the member’s lifetime allowance) | Death benefits must be paid in lump sum form, not as dependants’ pensions |
| Tax relief is available on life insurance premiums, whether paid through salary sacrifice or otherwise | Tax relief is available on life insurance premiums, unless they are paid through salary sacrifice |
| Lump-sum death benefits are usually exempt from inheritance tax | Lump-sum death benefits may be subject to inheritance tax if treated as forming part of the deceased’s estate |
| The regulatory and policy framework is well established | The regulatory and policy framework is relatively untested |
Overall, what this table demonstrates is that one of the main purposes of using an EGLP is for (generally speaking, higher earners) to take advantage of the greater tax savings in respect of lump-sum death benefits not being subject to the LTA. However, there are greater restrictions on facilitating those benefits than under the Registered Life Assurance scheme.
HMRC’s Insurance Policyholder Taxation Manual covers EGLPs and we would be happy to advise further on the merits of an EGLP.
Justin McGilloway, Partner and head of the Pension & Employee Benefits Team