For financial advisers only Relevant life technical guide

Transcription

1 For financial advisers only Relevant life technical guide Please note this communication is for financial advisers only. It mustn t be distributed to, or relied on by, customers.

2 About this guide We ve designed this guide to give you more information about relevant life policies from Aegon. It doesn t form part of any contract between you, your clients and/or us. The full terms and conditions of the contract are in the policy conditions and policy schedule, which we ll send to your client when their policy starts. The information is based on our understanding of current legislation, taxation law and HM Revenue & Customs practice, as at May 2014, which may change. Throughout this document we ve highlighted various technical protection terms in blue. To help you understand these terms, we ve explained them in a Glossary of protection terms which you can find at the end of this document. Contents About this guide 02 Committed to supporting you 03 What s a relevant life policy? 03 In what circumstances might a relevant life policy be suitable? 03 What are the legislative requirements for a relevant life policy? 03 What are the tax benefits of a relevant life policy? 05 How should the policy be set up? 05 What level of cover will we offer? 06 Declaration of trust for a relevant life policy 06 What happens when an employee leaves the employment of the employer? 08 Can a relevant life policy be used for business protection? 08 Appendix 1 Relevant life policy summary of benefits 09 Appendix 2 How do I set up a relevant life policy with Aegon? 09 Appendix 3 Glossary of terms 10

3 Committed to supporting you This is a detailed technical guide to our relevant life policy and the corresponding Declaration of trust for a relevant life policy. We strongly recommend that you read this technical guide carefully, before going ahead with the relevant life policy to make sure that there aren t any adverse taxation consequences for the employer, the employee or the trustees. We also recommend that the employer and employee take advice from a qualified tax adviser as the tax legislation surrounding relevant life policies is complex. As the tax legislation surrounding relevant life policies is complex, we sought Counsel Opinion from an eminent QC. What s a relevant life policy? A relevant life policy is an employer funded life assurance policy written on the life of an employee and which, provided it meets certain legislative requirements, benefits from favourable tax treatment. The employer can be a limited company, a limited liability partnership, a partnership, a sole trader (as a business with employees) or a charity. Directors of limited companies are generally employees. However, equity partners, members and sole traders (in their personal capacity as business owners) aren t employees, so they wouldn t qualify for this type of cover. What are the legislative requirements for a relevant life policy? The conditions that have to be met in order for a policy to qualify as a relevant life policy are:- Legislation defining a relevant life policy A relevant life policy is defined in S393B(4) of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA). This states, that a relevant life policy means:- (a) an excepted group life policy as defined in section 480 of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA) (b) a policy of life assurance, the terms of which provide for the payment of benefits on the death of a single individual, and with respect to which (i) condition A in section 481 of that Act would be met if paragraph (a) in that condition referred to the death, in any circumstances or except in specified circumstances, of that individual (rather than the death in any circumstances of each of the individuals insured under the policy) and if the condition did not include paragraph (b), and (ii) conditions C and D in that section and conditions A and C in section 482 of that Act are met, or In what circumstances might a relevant life policy be suitable? A relevant life policy could be suitable in the following circumstances:- n Where a small business doesn t have enough employees to qualify for a group life scheme, or n Where employees have substantial pension funds and they don t want the death in service benefits to form part of their pensions lifetime allowance. The premiums paid for the relevant life policy won t impact the employee s annual allowance either, or n Where the employer wants to provide death in service benefits, which exceed the amounts provided by the main company scheme. 03

4 (c) a policy of life insurance that would be within paragraphs (a) or (b) but for the fact that it provides for a benefit which is an excluded benefit under or by virtue of paragraph (a), (b) or (d) of subsection (3) ITEPA S393B. In other words, where terminal illness cover is available, the policy should meet the conditions under (a) or (b) above and this third condition, (c). Terminal illness cover is an excluded benefit under paragraph (a) of subsection (3) ITEPA, so long as it meets the criteria of being benefits in respect of ill-health or disablement of an employee during service. So, where terminal illness benefit is included on the policy, this benefit must only be payable whilst the employee is employed by the employer who is paying the premiums. Legislation Condition A in S481 ITTOIA is that under the terms of the policy a sum or other benefit of a capital nature is payable or arises (a) on the death in any circumstances of the individual insured under the policy who dies under the age specified in the policy that does not exceed 75, or (b) on the death, except in the same specified circumstances, of each of those individuals who dies under such an age. Condition C in S481 ITTOIA is that the policy does not have, and is not capable of having, on any day (a) a surrender value that exceeds the proportion of the amount of premiums paid which, on a time apportionment, is referable to the unexpired paid-up period beginning with the day, or (b) if there is no such period, any surrender value. Condition D in S481 ITTOIA means that no sums or other benefits may be paid or conferred under the policy except as mentioned in condition A and C. Condition A in S482 ITTOIA directs that any sums payable or other benefits arising under the policy must (whether directly or indirectly) be paid to or for, or conferred on, or applied at, the direction of (a) an individual or charity beneficially entitled to them, or (b) a trustee or other person acting in a fiduciary capacity who will secure that the sums or other benefits are paid to or for, or conferred on, or applied in favour of, an individual or charity beneficially. Condition C in S482 ITTOIA is that a tax avoidance purpose is not the main purpose, or one of the main purposes, for which a person is at any time Condition The policy must only provide a lump sum death benefit payable before age 75. The benefits paid must be capital in nature and not deemed to be income. The death benefit must be payable on the life assured s death in any circumstances apart from those excluded in the policy conditions. The employer can t specify under what circumstances the benefits will be paid. The policy doesn t have and mustn t be capable of having a surrender value. The benefits under the policy are limited to lump sum death benefits. In other words, critical illness, income protection or total permanent disability benefits aren t available. The benefits must only be payable to an individual or a charity, although they can be payable to a trustee(s) for them to pay the funds to an individual or a charity. The main purpose of the policy must not be tax avoidance. (a) the holder, or one of the holders, of the policy, or (b) the person, or one of the persons, beneficially entitled under the policy. 04

5 What are the tax benefits of a relevant life policy? A relevant life policy attracts beneficial tax treatment when compared to an ordinary life policy, which the employer funds on behalf of an employee. For the employee Exemption from the benefit in kind charge Generally, where an employer provides life cover for the personal benefit of an employee, the cost of the premiums paid will be a benefit in kind. However, under S307 ITEPA, where an employer provides an employee with a retirement or death benefit, even where this is not under a pension scheme, the provision of this benefit is exempt from income tax. In other words, the premiums on a relevant life policy won t be a benefit in kind, as the policy will be providing retirement (by way of terminal illness cover) or death benefits. Also, the payments of the premiums won t be subject to Class 1 National Insurance Contributions, where this income tax exemption is satisfied. Tax on benefits Part 7A ITEPA doesn t apply to an arrangement whereby an employer is providing an employee with a relevant life policy, as defined above. In other words, the disguised remuneration rules won t apply, meaning that there won t be an income tax or national insurance liability when benefits are paid out on a death or terminal illness claim. For the employer The employer should be able to claim tax relief in relation to the premiums paid, so long as the premiums meet the wholly and exclusively for the purposes of the business test. A shareholder/director of a close company should take tax advice, if they want to take out a large amount of cover on their own life, as the premiums may not qualify for tax relief. There will be no employer s National Insurance Contributions due in relation to the premiums paid. Also, there will be no income tax, corporation tax or capital gains tax implications for the employer when the policy pays out, where the policy is held in our Declaration of trust for a relevant life policy. The business tax adviser should be able to provide confirmation on the tax treatment of the policy for both the business and the employee. If not, then they may be able to seek clarification from HM Revenue & Customs (HMRC). How should the policy be set up? The employer will apply for a policy on the life of the employee via the business protection menu. The employer can be a sole trader (as a business with employees), a partnership, a limited liability partnership, a limited company or a charity. However, a sole trader (in their personal capacity as business owner), an equity partner in a partnership or a member of a limited liability partnership are not employees, so can t be covered under a relevant life policy. The policy must be written on a single life basis. The only benefits, which can be provided under the relevant life policy, are terminal illness cover during the employee s employment with the employer who is paying the premiums, and lump sum death benefits. In other words, the policy can t be used to provide other benefits such as critical illness benefits, income protection or total permanent disability cover. The sum assured can be level throughout the term or alternatively increasing or reducing life cover can be chosen. The employer will pay the premiums to maintain the policy and these will be paid by Direct Debit, either monthly or annually. Cover can be established for a fixed term of up to 50 years or on a five year renewable basis. However, it will be important to ensure that the plan can t continue beyond the employee s 75th birthday. The employer should put the policy in trust. This will mitigate the risk of the benefits forming part of the employee s IHT estate on death. We have a specimen Declaration of trust for a relevant life policy which has been designed for this purpose. Immediate cover facility We can provide immediate cover for the first 60 days, while any necessary medical information is being requested. In order for us to consider this, we need a completed application form with no adverse disclosures, a fully completed Direct Debit instruction, payment for the first 60 days premium by cheque or direct debit and all financial evidence. Renewal option Instead of setting up the benefit on a fixed-term basis, the employer can choose to renew the benefit every five years. At the end of each five-year term the policyholder (generally the trustees) can renew the benefit without the life assured having to provide any more information about the state of their health. The premium will be based on our premium rates and the life assured s age at the time the policyholder renews the benefit, and so may go up. This option is only available if the life assured hasn t been charged an extra premium or had additional exclusions on their policy for medical reasons. Indexation option The employer can select the indexation option to help protect the benefit amount against the effects of inflation. The benefit and premium will increase each year in line with the increase in the Retail Prices Index (RPI), subject to a minimum of 0% and a maximum of 10%. 05

6 What level of cover will we offer? There are no limits to the level of cover set out in legislation. However, if the level of cover chosen is large, then there s a risk that the premiums won t meet the wholly and exclusively for the purpose of the business test. We d recommend a shareholder/director of a close company take appropriate tax advice if they want to take out significant levels of cover on their own life. Usually the level of benefit will be calculated as a multiple of the employee s salary. The maximum level of cover offered by us will be:- Up to age 29 Ages Ages Age 56 and over 25 times salary 20 times salary 15 times salary 10 times salary For the purposes of the cover, salary could include bonuses, commission, overtime and P11D benefits. In the case of a shareholder director, dividends will also be taken into account. The financial underwriting evidence requirements will be as follows: n Up to 2,500,000: application only* n 2,500,001-5,000,000: application and proof of earnings (eg last 3 payslips, P60, accountant s letter the latter typically being for directors in receipt of low salary & large dividends which can t otherwise be evidenced) n 5,000,001+: application, proof of earnings, Personal financial questionnaire *While no formal evidence is routinely required, the sum assured will be assessed and sense checked against the multiple of earnings table above. However, we reserve the right to request additional evidence at any sum assured. Declaration of trust for a relevant life policy If either our Declaration of trust for a relevant life policy or a trust drafted by a solicitor is being used, the policy can t start until a valid trust form has been completed and accepted by us. We ve designed our Declaration of trust to hold one or more relevant life policies as the only trust assets, so no other assets should be placed in this trust. However, further relevant life policies on the life of the same employee can be issued or assigned to the trustees once the trust is in existence. A separate trust should be used for each employee who s to be covered under a relevant life policy. Our Declaration of trust for a relevant life policy is a discretionary trust. The trustees have powers to appoint the trust fund to anyone within the class of discretionary beneficiaries, which also includes the employee. The employee is included as a beneficiary, so that the policy can be assigned to them in the event that they leave the employment of the employer. The list of discretionary beneficiaries includes: any spouse or Civil Partner of the employee who is married or in a civil partnership with the employee immediately before their death any children of the employee any spouse or Civil Partner of the children, or following the death of the employee, any person who in the opinion of the trustees was a dependant of the employee immediately before their death. The class of beneficiary has been restricted in this manner to ensure that the income tax exemption under S307 ITEPA applies to the premiums paid by the employer. As the trust is a discretionary trust, the trustees control who benefits from the trust fund and when. It s important that the trustees discretion isn t compromised, so the employee won t be able to make a binding nomination, detailing who is to benefit in the event of their death. However, the employee should consider completing the nomination form accompanying our trust deed, highlighting who they would ideally like to benefit from the trust fund and stating the reasons why. This will help to guide the trustees, as to the employee s wishes, when they have to use their discretion. 06

7 The appointment and retirement of trustees Under the terms of the trust, the trustees have the power to appoint new or additional trustees. An individual trustee must be over 18 and of sound mind. The employee or other beneficiary under the trust can be appointed trustee. A corporate body or a trust corporation can be the sole trustee. However, in the case of individuals, there must be at least two trustees. The employee has the power to remove a trustee or a trustee can retire, as long as there are still two individual trustees, a trust corporation or corporate body acting. We have sample deeds available for use, where a trustee wishes to retire or where a new trustee is to be appointed. Law governing the trust The trust is subject to the law of England and Wales. Trust flexibility The trust can last for up to 125 years. This means that the trustees don t need to distribute the claim proceeds to the beneficiaries straight away. This could be useful where the beneficiaries are minors, as the trustees can control when they receive distributions from the trust. Tax treatment of the trust Income Tax on a Chargeable Event There should be no income tax charge arising in the event of a terminal illness or death claim. As the policy doesn t have a surrender value, there won t be a chargeable event gain arising. Capital Gains Tax There are no capital gains tax implications when a relevant life policy is assigned to the trustees or when a claim is paid. Inheritance Tax (IHT) On the employer There will be no IHT due on the payment of the premiums. A non-close company (generally a company controlled by more than five shareholders) can t make a transfer of value for IHT purposes. In the case of close companies, partnerships or sole traders, relief should be available if the premiums meet the wholly and exclusively for the purposes of the business test. On the Trustees ongoing IHT charges The relevant property regime will apply during the lifetime of the trust. In other words, the trustees will potentially be subject to exit charges when capital is paid out of the trust and to periodic charges (also known as 10-year charges). Periodic charge On each 10-year anniversary of the creation of the trust, the trust is assessed for IHT. There will be a periodic tax charge of a maximum of 6%, if the value of the trust fund immediately before the 10-year anniversary, is more than the prevailing nil rate band. A relevant life policy won t usually have a market value, so in most cases there should be no IHT payable. A charge could arise if:- n The life assured is critically or terminally ill immediately before the 10-year anniversary, or n There s a claim being processed and/or the proceeds are still held in trust immediately before the 10-year anniversary. Exit charge An exit charge is normally triggered when some or all of the trust fund is distributed to the trust beneficiaries. If the claim proceeds are distributed to the trust beneficiaries before the first 10-year anniversary, it won t generally give rise to a tax charge. This is because the calculation of an exit charge takes into account the value of the trust fund at the start of the trust (which should be nil or low) and any additions to the trust before an exit charge is triggered (the payment of the premiums will usually be covered by exemptions). If an exit charge arises after the first 10-year anniversary, the rate of tax is based on the rate at the last 10-year anniversary. However, in most cases, there won t be a periodic charge at each 10-year anniversary and in most cases, an exit charge shouldn t arise between 10-year anniversaries. The maximum rate of tax is 6%, though this is reduced depending on how long it s been since:- n The creation of the trust if the exit charge occurs before the first 10-year anniversary, or n The last 10-year anniversary. A shareholder/director of a close company who provides funding for the company and directs that the company takes out cover on his life which is placed in a trust with him as a beneficiary, should take tax advice to ascertain whether this arrangement will be deemed a gift with reservation of benefit. 07

8 What happens when an employee leaves the employment of the employer? There are various options:- 1. The employee wants to keep the existing policy and trust in place taking over the payment of the premiums. In this scenario:- n The employee could complete a Deed of removal of trustee to remove the previous employer as a trustee or the previous employer could complete a Deed of resignation of trustee and a replacement trustee would be appointed by Deed of appointment of trustee, if necessary (as a minimum, there should be at least two individual trustees or one corporate trustee). n The trustees will need to complete a Deed of removal of beneficiary to remove the employee from the discretionary class of beneficiary under the trust this will then make sure that the IHT benefits of the trust continue and there are no gift with reservation of benefit implications. n The employee can then take over the payment of the premiums to maintain the policy. The ongoing payment of the premiums may be covered by an IHT exemption such as normal expenditure out of income. Where they aren t, they ll be chargeable lifetime transfers. 2. The employee wants to have their policy transferred into their own name. In this scenario:- n The trustees would have to complete a Deed of appointment of beneficiary to appoint the trust fund to the employee. n The trustees would complete a Deed of assignment to assign the ownership of the policy to the employee. n The employee would then take over the payment of the premiums. n The employee has the policy in their IHT estate, so they may want to consider putting the policy in a Flexible Trust. Alternatively, the employee may want to use the policy as security for a loan. However, in these circumstances, if a subsequent employer wants to fund a relevant life policy for the employee, the employer will have to take out a new policy and place this in a new Declaration of trust for a relevant life policy. 3. The employee leaves the employment of their current employer and their new employer wants to take over the funding of the policy immediately. n The trust and policy both remain in force. n The employee will complete a Deed of removal of trustee to remove the previous employer as trustee or the original employer will complete a Deed of resignation of trustee. The new employer will complete a Deed of appointment of trustee. n The new employer will take over the payment of the premiums. 4. If the employee leaves the employment of the current employer, takes over the payment of the premiums themselves for a while leaving the policy in the Declaration of trust for a relevant life policy, then a new employer steps in to take over the funding of the policy, the steps would be as follows:- When the employee leaves the original employer:- n The employee could complete a Deed of removal of trustee to remove the previous employer as trustee or the previous employer could complete a Deed of resignation of trustee. A replacement trustee could be appointed by Deed of appointment of trustee, if necessary (as a minimum, there should be at least two individual trustees or one corporate trustee). n The trustees will need to complete a Deed of removal of beneficiary to remove the employee from the discretionary class of beneficiary under the trust this will then make sure that the IHT benefits of the trust continue. n The employee can then take over the payment of the premiums to maintain the policy. When the employee starts employment at the new employer:- n The new employer will take over the payment of the premiums. n The new employer can be appointed as trustee by Deed of appointment of trustee. n As the Deed of removal of beneficiary is irrevocable, the employee will remain excluded as a beneficiary under the trust. Can a relevant life policy be used for business protection? No. A relevant life policy can t be used for the purposes of business loan cover, business continuity or business succession planning. 08

9 Appendix 1 Relevant life policy summary of benefits Main benefits Pre completion benefits Benefits automatically included Additional benefits Immediate cover facility Terminal illness benefit** Waiver of premium Renewal option Indexation option (accident and sickness) Life protection Reducing life protection **If the life assured leaves the employment of the employer paying the premiums, the policy could be maintained by the employee personally. However, under the terms of the policy, the terminal illness cover will stop. The following changes can be made at any time, subject to terms and conditions and underwriting: reduce or increase benefit amount, reduce or increase benefit term, or change premium frequency. Appendix 2 How do I set up a relevant life policy with Aegon? The employer will apply for a policy on the life of the employee using our business menu. Online services If applying using our online services, you should submit your details online (using the data capture form) and post the Declaration of trust for a relevant life policy to Aegon, Lochside Crescent, Edinburgh Park, Edinburgh, EH12 9SE. Paper applications If applying using a paper application form, you should complete the Business Protection application form and the Declaration of trust for a relevant life policy and send them both to Aegon, Lochside Crescent, Edinburgh Park, Edinburgh, EH12 9SE. You can download copies of the application and our Declaration of trust forms from our website. 09

10 Appendix 3 Glossary of terms Annual allowance This is an annual contribution (employee and employer) ceiling for tax relief purposes. Any contributions above the annual allowance will be charged at the employee s marginal rate of income tax. For the 2014/15 tax year, the annual allowance is 40,000. Benefit in kind These are things other than salary or wages, which an employer gives to an employee for doing their job, for example a company car or a clothes allowance. Some benefits in kind are subject to income tax and some are not. Chargeable lifetime transfer A chargeable lifetime transfer is a gift for IHT purposes that is neither exempt nor potentially exempt. Gifts into most types of trusts, apart from bare trusts, are chargeable lifetime transfers. Where the value of the chargeable lifetime transfer added together with other chargeable lifetime transfers in the previous seven years exceeds the nil rate band ( 325,000 in 2014/15) fixed at 325,000 until the end of the tax year 2017/18, there will be an immediate IHT charge of 20%. Close company Many private companies resident in the UK will be close companies. The definition of a close company is complex. Generally, a close company is a UK resident company controlled either directly or indirectly by five or fewer shareholders. Disguised remuneration rules Employers, directors and employees use arrangements such as trusts to avoid, reduce or defer income tax liabilities in relation to remuneration paid for services provided by employees to the company. The disguised remuneration rules were introduced by HMRC to tackle such arrangements. Equity partner An equity partner is a partner in a partnership, who owns a share of that business. Gift with reservation of benefit Where an individual gifts property or assets and there are strings attached to the gift or the donor still retains access to or continues to use the asset following the transfer of ownership, then it is likely that the gift with reservation of benefit rules will apply. Where an asset is deemed to be a gift with reservation of benefit, the value of the asset remains within the donor s IHT estate. 10

11 Pensions standard lifetime allowance This is the limit that applies to the total value of pensions savings an individual can have under all registered pension schemes, that will benefit from tax relief. For the tax year 2014/15 the pensions standard lifetime allowance is 1.25 million (although this may be more if the individual has an enhanced personal lifetime allowance). Normal expenditure out of income exemption Gifts that are made from the donor s income after tax and which form part of their normal expenditure, will be exempt from IHT, so long as the donor doesn t have to use their capital to maintain their normal standard of living following these gifts. P11D benefits Taxable benefits in kind. Tax avoidance It is impossible to give a comprehensive definition of tax avoidance. If there is any doubt, the employee s or business s accountant should seek confirmation of the situation from HMRC. Placing a relevant life policy in trust or marketing the policy as having beneficial tax treatment can t be deemed to be tax avoidance, as the legislation provides that the policy can be owned by trustees and that the benefits provided are exempt from tax. Ten year anniversary This is the 10 year anniversary of the date that the trust was created and occurs every 10 years thereafter. Transfer of value A transfer of value occurs when an asset is transferred by an individual during their lifetime, by way of gift, or on death and as a result, the value of their estate is reduced. wholly and exclusively for the purposes of the business test For tax relief to be available in relation to a particular expense incurred in running the business, the reason for that expense must be wholly for the purpose of the trade or business. In other words, the expense shouldn t serve a dual purpose (eg it shouldn t have some business and non-business use, with the split between the two not being readily recognisable). Non-business related expenditure isn t tax deductible. 11

12 As Lead Partner of British Tennis, we re helping to transform the future of the sport by supporting young talent, national teams and events throughout the country, including the Aegon Championships at The Queen s Club. Find out more at aegontennis.co.uk Aegon is a brand name of Scottish Equitable plc. Scottish Equitable plc, registered office: Edinburgh Park, Edinburgh EH12 9SE. Registered in Scotland (No ). Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Financial Services Register number An Aegon company Aegon UK plc C IP /14