Excepted group life schemes are an alternative to the formal Registered regime and have sometimes been perceived as simpler to administer. They do not need to be registered with HMRC, but have complexities of their own.
Excepted and Registered group life schemes both payout on the death of an individual, but the survivors and beneficiaries may be treated very differently. Very different outcomes for otherwise identical taxpayers are possible depending on when they fall ill or die. Unlike Registered trusts, which are governed by pensions legislation, Excepted schemes fall under the Relevant Property Trust regime and are subject to much more complex rules.
In 2010 there were 2,877 Excepted schemes compared with 8,686 in 2018. This is due in part to the reduction in the Lifetime Allowance (LTA) from its highest value in 2010/11 (£1.8m) to its lowest in 2016/17 (£1m). As more people reach these levels, the more likely they are to be affected by an LTA charge. HMRC reported that £5m in tax was collected from individuals exceeding LTA in 2006/7 compared with £102m in 2015/16. 
Excepted schemes have to satisfy seven criteria set out in the Income Tax (and Other Income) Act 2005  and the benefits are not assessed against the LTA. They provide an alternative to the Registered regime but are really designed for individuals who have some sort of pension protection or may be affected by the LTA. For individuals who have applied for pensions protection, inclusion in an Excepted scheme will not jeopardise it in any way. However, there are other charges which could be applied at the point of death – entry, exit and periodic charges.  These charges could result in a very different outcome for the recipient of any benefits.
There is a question whether the Excepted trust has any actual value. The only asset of the trust is the Excepted group policy. Opinions differ on how this might be calculated, but the view from experts seems to be that there could be a value at the start of the trust if any member was considered to be terminally ill at that point. An entry charge could be as much as 20% of the fund value less any unused Nil Band  entitlement.
Periodic charges may also apply if:
- a death had occurred before the ten year anniversary of the trust and the proceeds had not yet been distributed by the trustees, and
- the policy covered the life of an employee who was terminally ill at the ten year anniversary date.
Periodic charges are based on 6% of the fund value less any unused Nil Band entitlement.
One complication in assessing health is that many Excepted group schemes benefit from a pre-agreed amount of benefit which is available without the need for medical underwriting. This makes it difficult for the trustees to anticipate if an entry charge may be appropriate. If a death occurs and there is reason to suspect the member may have been terminally ill at the time of inclusion in the trust or a periodic charge date, the trustees may have to apply to the Government’s Actuary to assess the appropriate fund value. This may also involve asking the family to provide evidence of the individual’s health before they died, at what would be a difficult and emotional time.
If the trustees delayed distribution of funds pending an assessment, could this push final payment beyond the ten year anniversary date and trigger a further charge?
The trustees could decide to pay a proportion of the benefit and retain some to cover any charges, but this could be difficult to justify if the benefit due is set out in a contractual agreement. Is this fair treatment of the bereaved family?
A further complication is reporting for Inheritance Tax by the deceased’s Legal Personal Representatives (LPRs). Multiple forms are required and the inconsistency of language used around employee benefits makes it extremely difficult to understand which forms are relevant. HMRC themselves state that if an Excepted scheme is mentioned in the main form (IHT400) then the matter should be referred to their technical team.  No wonder a layman may struggle. Is this fair treatment of the bereaved family?
Industry bodies claim the amount spent by UK businesses on establishing and managing Excepted schemes far outweighs the amount collected in taxes and there has been a collective call for the treatment of Excepted schemes to be simplified. The Association of British Insurers (ABI), the Investment & Life Assurance Group (ILAG) and Group Risk Development (GRiD) have all responded to a consultation launched by HMRC about the taxation of trusts.  There is strong feeling that the taxation of trusts which are used to provide benefits for the families and dependants of employees is not transparent, fair or simple and should be addressed urgently.