A guide to trusts: registered vs. excepted

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What’s the difference between excepted and registered trusts? It’s a common question in our conversations with advisers, and an important consideration when setting up a new group life policy.

Our quick guide is designed to help you navigate the world of trusts, so that you can advise your clients on the best option for them. 

 

What is a group life trust?

A group life trust is a legal document detailing the rules of a scheme, which provides death in service benefits to employees. Every group life trust must have one or more trustees. The trustees have a number of responsibilities, including:

  • Following the rules for trusts and keeping the trust updated
  • Navigating the employee’s expression of wish and determining the beneficiaries that will receive the benefit when a death claim is made
  • Calculating whether any IHT charges apply to the trust
  • For some types of trust, reporting information to HMRC.

A trust must be in place before cover begins for a group life scheme.

 

Registered vs excepted – what’s the difference?

There are two options to consider when it comes to establishing a trust: registered or excepted.

Registered trust

The majority of AIG’s group life policies are set up under a registered trust. A registered group life policy is subject to pension scheme tax rules, which means that any lump sum benefit paid in the event of a death claim contributes towards the employee’s lifetime allowance (LTA).1  

It is the most flexible type of trust as it can accommodate employees insured for different levels of benefit within the same policy. It’s also the simplest to understand, as no additional IHT charges apply.

Excepted trust

The alternative, an excepted group life policy, is not subject to pension scheme tax rules. This means that life insurance benefits on an excepted policy do not count toward the LTA, but are subject to life insurance legislation.

As a result, IHT charges may apply:

  • On the ten year anniversary of the trust
  • On exit if there is a value in the trust at that time (for example if an employee dies and the benefit is yet to be paid to the beneficiaries, or if an employee is terminally ill)
  • When the trust is first set up, if there is a terminally ill employee 
Trusts comparison table

The table below sets out the key differences between registered group life and excepted group life.

Situation Registered Excepted
Subject to pensions legislation Yes No
Subject to life insurance legislation No Yes
Multiple levels of cover can be accomodated in the same policy Yes No
Lump sum benefits can be provided Yes Yes
Death in service pensions can be provided Yes No
Needs to be registered with HMRC and obtain a Pension Scheme Tax Reference (PSTR) Yes No
Lump sum benefit payments are subject to the Lifetime Allowance (55% tax charge on benefits exceed in £1,073,100 (2020/21)) Yes No
Entry into the policy may impact employee's fixed protection Yes No
Equity partners and LLP members can ONLY be included if other employees are also included Yes No
Tax relief on premiums paid by employers may be available, subject to the employers's local tax inspector Yes Yes
Death in service pension subject to income tax Yes No
Benefits are not normally subject to inheritance tax Yes Yes
Trust may be subject to exit and periodic charges* No Yes

*Tax charges after 10 years (periodic charge) and on exit may apply if there is value in the trust at that time, created if an employee dies and the benefit is yet to be paid to the beneficiaries, or if an employee is terminally ill. (2)

Writing life insurance into trust – how we can help

After agreeing with your client which trust is best for them, the AIG team will help you to set up a trust simply and quickly. Our trusts are managed by PTL, an award-winning specialist in professional trusteeship and governance.

Registered master trust

The AIG registered master trust is a single trust, available to our registered group life policyholders. With our master trust, employers don’t need to maintain their own trust or act as trustees in the event of a death; PTL take care of all the legal responsibilities.

Both new and existing schemes can opt to join the trust at no extra cost.  Joining is as simple as the tick of a box within our application form - there are no lengthy legal forms for your client to complete.

Excepted life trust

Our excepted life trust service provides your clients with a properly worded trust deed to complete and execute. The trust is managed by the professional trustees at PTL. Their knowledge and experience helps to identify and pay beneficiaries as soon as possible.

The excepted life trust will be wound up after eight years, so there’s no need to worry about the potential IHT charge at ten years. At the eight-year point, we will provide your clients with the right documentation to be able to set up a new trust.

 

Get in touch

If you’d like to talk to one of our team about a trust for a new or existing client, get in touch with us by emailing groupquotes@aiglife.co.uk or calling us on 020 3003 6262.

 

 

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