A guide to trusts: registered vs. excepted
What’s the difference between excepted and registered trusts? It’s a common question you may face in conversations with clients, 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.
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.
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.
|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 (2022/23))||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||N/A|
|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. Of course, this isn't the only option. Your client can use their existing trust or set up a new one.
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.