Non Pension Life Assurance with Tax Relief

RELEVANT LIFE POLICIES

Synopsis: An overview of relevant life policies

Last Reviewed: Monday, July 28, 2014
Last changes made: Reviewed to take account of Budget 2014

IMPORTANT GUIDANCE

When reading a topic in the Information Library you should always click the “Related Bulletins” button within that topic to be sure that you have the latest information on the subject you are researching.

Especially in the time between the Budget and Finance Act you should always check the Budget Bulletin for that year to discover the latest proposals.

Contents

Definition

Legislation background

HMRC views

Definition

Relevant Life Policy (RLP)

• is a term assurance effected by an employer on the life of an employee and funded by the employer

• provides for a lump sum benefit payable on death before age 75. It may, in addition, provide benefits in respect of ill health (which would include terminal illness benefits), disablement or death by accident of the employee during employment

• provides no other benefits and does not have a surrender value at any time

• is effected by the employer subject to a trust under which only individuals and charities can benefit

• is designed to meet the criteria for a ‘single life’ relevant life policy set down in sub-sections 393B (4) (b) and (c) of the Income Tax (Earnings and Pensions) Act 2003.

Legislative background

RLPs are a form of benefit provided by employers to employees. Following the changes to pensions in the UK introduced from 6 April 2006, i.e. post ‘A-day’, only certain types of benefit, including death-in-service benefits, are treated in a favourable way for tax purposes. It is well known that registered pension schemes provided by employers benefit from special tax concessions.

Where an employer establishes any form of benefit scheme for an employee(s) other than a registered pension scheme, the scheme will generally be taxed as an employer-financed retirement benefits scheme (EFRBS) because it pays out ‘relevant benefits’. An exception exists for schemes that provide ‘excluded benefits’. The benefits payable under an RLP are treated as excluded benefits.

Because the benefits paid under an RLP are not treated as relevant benefits, an RLP is not taxed in the same way as an EFRBS (section 393B ITEPA 2003).

Employer payments into most EFRBS and other trust arrangements are now subject to the disguised remuneration tax rules. This could result in a tax liability on the employee based on the employer contribution. Fortunately, there is a specific provision which excludes employer contributions to an RLP from taxation on the employee under the disguised remuneration tax rules.

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The statutory conditions that need to be satisfied for a policy to qualify as an RLP are covered in ‘The statutory conditions to satisfy for RLP treatment’.

HMRC views

There is very little available from HMRC on the subject of RLPs.

In correspondence it has clarified two specific points, namely:

(a) the ability to include disability/illness benefits in policies and

(b) the applicability (or rather non applicability) of section 1290 Corporation Tax Act 2009 to premium payments under an RLP. This means, broadly, that the deduction available to the employer will not be dependent on a benefit having been paid and taxed.

In addition, it does allude to RLPs in EIM 15021 with the statement: ‘benefits under a relevant life policy. Guidance on the meaning of this is available in the Insurance Policy Taxation Manual (IPTM)’. The guidance is in IPTM 7025 and given for excepted group life policies which are relevant life policies but with more than one life assured.

 SOCIAL SECURITY BENEFITS/PENSIONS – STATE BENEFITS

Synopsis: Summary of Social Security benefits available following a death in the family

Last Reviewed: Tuesday, July 29, 2014
Last changes made: Updated for general review

IMPORTANT GUIDANCE

When reading a topic in the Information Library you should always click the “Related Bulletins” button within that topic to be sure that you have the latest information on the subject you are researching.

Especially in the time between the Budget and Finance Act you should always check the Budget Bulletin for that year to discover the latest proposals.

Contents

Bereavement Payment

Widowed Parent’s Allowance

Bereavement Allowance

Pensions Act 2014 Changes

Generally speaking, State benefits following death are aimed towards alleviating the problems arising following the death of one of a legally married couple. In the past benefits were paid solely to women whose husbands had died. Since 9 April 2001 benefits are paid to both widows and widowers. Since December 2005, under the Civil Partnership Act 2004, same-sex couples who register as civil partners are treated in substantially the same way as married couples. The level of benefits will depend on whether there are any dependent children as well as on the age of the widow/widower. The following is an outline of the social security benefits which may currently be available following the death of a spouse. It should, however, be noted that the draft Pensions Bill 2013 contains provisions to replace the Bereavement Payment, the Widowed Parent’s Allowance and the Bereavement Allowance with a new Bereavement Support Payment although this is yet to be enacted (see section 4 below).

Bereavement Payment

A tax free lump sum of £2,000.

Conditions – payable to all widows or widowers or civil partners (from December 2005) unless:

(i) the deceased’s NI contribution record is inadequate. The test is payment of a minimum number of contributions in any one tax year prior to death. The test does not apply if death occurred as a result of an industrial accident or an industrial disease.

(ii) both the survivor and the deceased were over State Pension Age at the time of the death and the deceased was entitled to the Basic State Pension at death.

Availability

On claim, within 12 months of death.

Means-tested?

No.

Widowed Parent’s Allowance

A taxable weekly benefit which is payable to a parent whose husband, wife or civil partner has died if they have at least one dependent child for whom they are entitled to Child Benefit. It is payable until they cease to be eligible for Child Benefit the claimant reaches State Pension Age or upon cohabiting/remarriage/formation of civil partnership. The rate for 2014/15 is the same as the maximum bereavement benefit – £111.20 a week. A recipient of Widowed Parent’s Allowance cannot also receive Bereavement Allowance.

Conditions

(i) The claimant is getting Child Benefit for at least one child and the deceased husband, wife or civil partner was their parent.

(ii) The claimant is under State Pension Age when their husband, wife, or civil partner died

(iii) The deceased must have paid a minimum amount in NI contributions in any one tax year before death and for the requisite number of years (based on his/her working life). This does not apply if death was due to industrial accident or disease.

(iv) If NI contributions not paid for the requisite number of years, benefit is cut back.

Availability

Payable immediately. No need to claim as eligibility notified at the time of claim for Bereavement Payment.

Means-tested?

Earnings, capital and income ignored. However, benefit cut back if in receipt of certain social security benefits.

Subject to benefits cap

A limit will be put on the total amount of benefit that most people aged 16 to 64 can get. This is called a ‘benefit cap’. Local councils introduced this between 15 April and 30 September 2013.

The level of the cap will be:

  • £500 a week for couples (with or without children living with them)
  • £500 a week for single parents whose children live with them
  • £350 a week for single adults who don’t have children, or whose children don’t live with them

It will be based on the aggregate benefits received from the following:

  • Bereavement Allowance
  • Carer’s Allowance
  • Child Benefit
  • Child Tax Credit
  • Employment and Support Allowance (except where it is paid with the support component)
  • Guardian’s Allowance
  • Housing Benefit
  • Incapacity Benefit
  • Income Support
  • Jobseeker’s Allowance
  • Maternity Allowance
  • Severe Disablement Allowance
  • Widowed Parent’s Allowance (or Widowed Mother’s Allowance or Widows Pension where this commenced before 9 April 2001).

Bereavement Allowance

A taxable weekly benefit which is paid to someone for 52 weeks (or until State Pension Age, if earlier) from the date of death of their wife, husband or civil partner if they are 45 or over and under State Pension Age. The rate of Bereavement Allowance is reduced by about 7% for each year the claimant was under the age of 55 as at the date of death of their spouse or civil partner. For 2014/15 it varies between £33.36 a week at 45 to £111.20 a week at age 55.

Conditions

All three of the following conditions apply:

 a widow ,widower or surviving civil partner who was aged 45 or over but under State Pension Age when their partner died or aged 45 or over but under their State Pension Age when Widowed Parent’s Allowance ceases

 not bringing up children (i.e. is not entitled to Widowed Parent’s Allowance)

 the NI contributions paid by the deceased must have been sufficient to qualify for Widowed Parent’s Allowance – see earlier.

Availability

(i) Widows and widowers aged 45 and over but under State Pension Age when their spouse died and not entitled to Widowed Parent’s Allowance.

(ii) Widows and widowers aged 45 or over but under State Pension Age when Widowed Parent’s Allowance ceases.

No need to claim. Eligibility notified at time of claim for Bereavement Payment, or when Widowed Parent’s Allowance ceases.

Means-tested?

Earnings, capital and income ignored. Cut back if in receipt of certain social security benefits.

Subject to benefits cap

A limit will be put on the total amount of benefit that most people aged 16 to 64 can get. This is called a ‘benefit cap’. Local councils introduced this between 15 April and 30 September 2013.

The level of the cap will be:

  • £500 a week for couples (with or without children living with them)
  • £500 a week for single parents whose children live with them
  • £350 a week for single adults who don’t have children, or whose children don’t live with them

It will be based on the aggregate benefits received from the following:

  • Bereavement Allowance
  • Carer’s Allowance
  • Child Benefit
  • Child Tax Credit
  • Employment and Support Allowance (except where it is paid with the support component)
  • Guardian’s Allowance
  • Housing Benefit
  • Incapacity Benefit
  • Income Support
  • Jobseeker’s Allowance
  • Maternity Allowance
  • Severe Disablement Allowance
  • Widowed Parent’s Allowance (or Widowed Mother’s Allowance or Widows Pension where this commenced before 9 April 2001).

Pensions Act 2014 Changes

The Pensions Act 2014 contains provisions to replace the Bereavement Payment, the Widowed Parent’s Allowance and the Bereavement Allowance with a single new Bereavement Support Payment (BSP). This new payment will have two components:

• A one-off tax-free lump sum payment, the ‘indicative amount’ of which is £2,500 for a recipient without dependent children and £5,000 where there are dependent children.

• Further monthly tax-free payments for one year only, the ‘indicative amount’ of which is £150 for a recipient without dependent children and £400 where there are dependent children.

The qualification criteria will be simplified for BSP, so that the full payment is made as long as: the person is: under SPA at the time of his or her spouse or civil partner’s death; is ordinarily resident in Great Britain or other territory specified in regulations; and the contribution condition is met.

In order to meet the contribution condition the deceased spouse or civil partner must have paid Class 1 or 2 National Insurance contributions at or greater than 25 times the lower earnings limit (as defined in the Social Security Contributions and Benefits Act 1992) for any one tax year prior to his or her death.

The contribution condition will be considered to have been met if the deceased spouse or civil partner died as a result of an industrial injury or accident, as provided for by the industrial injuries benefit legislation in the SSCBA 1992.

BSP will not be payable to anyone over SPA; if a person is entitled to BSP when he or she reaches SPA his or her entitlement will cease and he or she will not receive any further payments.

The Act does not specify a start date for BSP, but the impact assessment suggests 2017/18 ‘at the earliest’.

As with the single-tier pension reform, the move from the current regime to BSP will create winners and losers:

• Childless couples where the survivor is under 45 are obvious winners, as they will receive £4,300 tax-free, against £2,000 today.

• Beyond age 45, the maths depends upon the assumed tax rate of the survivor – the crossover is 48 for basic rate taxpayers and 53 for 40% taxpayers.

• Couples with children will generally be the losers, unless their entitlement to Child Benefit is due to end within a couple of years of the death.

The winners and losers calculation is complicated by the interaction of the current benefits with other entitlements, something that will fall away for BSP. The losers under BSP will be thrown onto means-tested Universal Credit if they need additional benefits.

The DWP’s cost projection show that in 2017/18 the combined cost of BSP and the legacy of the current arrangements will be £40m more than the current regime would be. However, the legacy cost naturally drops over time with the result that by 2020/21 there is no additional cost. In the long term – which the DWP impact assessment carefully avoids – the cost of BSP should be much lower because of the disappearance of the Widowed Parent’s Allowance payments, which can run up until the youngest child reaches age 20.

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