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What could happen if a stand-alone group life scheme is not set up or registered correctly?

In brief...
There could be major consequences if a stand-alone group life scheme is not set up and registered correctly with HMRC.
The insurance contract could be invalid.
HMRC registration could be invalid.
Premiums might not receive beneficial tax treatment.
Benefits might not be exempt from taxation.
Both individual and corporate trustees can receive a fine.

This note highlights some of the possible consequences if the correct procedure is not followed when setting up and registering a stand-alone group life scheme.

Scheme not established
If a trust deed was never executed there will be no scheme setting out the benefits that would be payable, and no trustees or scheme administrator, as the trust deed appoints these. This can have serious implications.

  • As the group life policy is normally taken out by the trustees with the insurer, if there is no trust there are no trustees in place and are no benefits in existence to be insured. Therefore there is no insurable interest and the contract would be invalid. An insurer would be within their rights to decline any death claim, even if premiums had been paid.
  • HM Revenue and Customs (HMRC) registration would be invalid, if it has been applied for.
  • Only the scheme administrator can register a scheme, but no administrator has been appointed.
  • A requirement of registration is that there has to be a trust (or other arrangement) in place which establishes the scheme, and this will not be the case.

So whoever applied for registration has made a false declaration when completing registration and could receive a fine from HMRC.

  • If the insurer does agree to pay any claims, any tax benefits for a registered scheme would not apply as registration is invalid. These benefits include:
    • Premiums being treated as a business expense.
    • Premiums not being treated as P11D earnings for employees.
    • Benefits not subject to inheritance tax.

It is not clear how HMRC would treat any premiums or benefits for tax purposes.

A further problem is who to pay the benefits to as there are no trustees. It would not be appropriate to pay the benefit to the employer, as this might be treated as income to the employee and so be subject to tax and National Insurance contributions. The only option is to pay the benefit to the deceased’s executors or the beneficiary. But what if there is no will?

Around half to two thirds of people in the UK die intestate, and it will not be possible to pay any benefit unless a beneficiary can be suitably identified.

HMRC registration not completed
So if a trust has been executed, but registration hasn’t been completed, the scheme would be treated as an unregistered scheme.

Therefore, the tax benefits applicable to registered schemes mentioned earlier would not apply.

If the cover met the requirements of an excepted policy and there was only one level of lump sum benefit, it might be possible to treat the scheme as an excepted policy. If not, it would be treated as an Employer Funded Retirement Benefit Scheme (EFRBS), and the tax implications would be quite severe. For example, all benefits are subject to income tax and National Insurance contributions, plus the employer cannot treat the premiums as a business expense.

Scheme not registered with HMRC correctly
If, for example, the trust deed was executed after registration with HMRC, registration will have been completed incorrectly.

The person who registered the scheme will have made a false declaration and therefore could be subject to a fine from HMRC.

Otherwise the registration is invalid, so this has the same impact as the HMRC registration not being completed and technically registration would have to be undertaken again.

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