How cross-sector collaboration clarified life and health trusts registration protections

The 1 September deadline has passed for registerable trusts in the UK, simplifying the timescale to the same 90 days for all nontaxable trusts.

It seems a good time to highlight other simplifications that may not be immediately apparent, in particular those affecting trusts of insurance policies.

Exemption exceptions rollercoaster

Insurers have long relied on trusts as the obvious vehicle for administering group insurances or death benefits. This is despite the difficulties in making these sufficiently accessible to the more than one million people who buy single own life policies every year.

It was therefore a shock to the industry to learn in 2019 that His Majesty’s Revenue and Customs (HMRC) proposed that the full details of all express trusts be registered.

A grand collective sigh of relief followed in 2020, when HMRC confirmed its intention to exempt trusts of pure protection life assurance policies from registration. However, this proved premature when the draft rules came out and some misunderstandings became evident.

When is protection not protection?

According to the draft rules, the answer to this seemed to be protection:

  1. For temporary disablement
  2. That has paid out (unless death proceeds disbursed within two years)
  3. For healthcare services in a policy other than ‘life insurance’, and
  4. If the policy is capable of having a surrender value.

This presented problems in various quarters of STEP and the industry. Several STEP members and industry representatives were able to address them with HMRC.

Inclusion of benefits payable for temporary disablement

These are primarily provided under ‘income protection’ policies, previously described as ‘permanent health insurance’ (PHI). Confusingly, accident, sickness and unemployment policies are also described as ‘income protection’.

HMRC had not exempted temporary disablement under these latter policies because it thought they could be more easily manipulated for money laundering. Initially, industry representatives did not mind, imagining neither type of cover to be generally found in trusts.

However, investigation revealed some individual PHI cover is included in trusts of life cover, affecting several insurers. Additionally, some elements of critical illness cover can relate to temporary disability.

In both cases, trusts set up to deal with the associated life cover would have immediately become registrable, although very difficult to identify where already in force, and despite not being of the type causing concern.

Simplification: Temporary disablement is now listed as exempt where the cover was taken with other exempted insurance types (although that update has not filtered through to all pages of the HMRC guidance yet).

Proceeds paid for illness

The exemptions are for trusts holding insurance policies but not money, even though originating from the policies. In practice, this is particularly relevant where critical or terminal illness cover is claimed by the life assured under an individual policy that is in trust simply to ensure direction of death benefits should an illness claim not be paid out first.

Bearing in mind the (very ill) life assured is usually the lead trustee of such policies, it seems particularly harsh and unnecessarily bureaucratic to require them at this point to register the trust. They will then have to update the details as a ‘closed trust’, especially as by the time of registration, the trust will probably have closed.

Simplification: Trustees should direct the insurer to pay direct to the life assured, rather than via themselves. Payment to the trustees triggers the requirement to register.

Healthcare services

Providers of healthcare services using trusts found the original exemption did not exempt their trusts providing healthcare services where the trust holds funds for such services or an insurance policy unrelated to life insurance. HMRC confirmed the intention was to exempt trusts of the latter, but not the former.

Rectification: Healthcare policies are now correctly described under the exemption.

Whole of life with possible surrender value

It is a common misapprehension that whole life policies will have a surrender value and that it will be significant, even a primary reason for buying the policy. A life policy that can have a surrender value is not ‘pure protection’.

However, some STEP members queried whether the spirit of the exemption relating to protection policies should reasonably apply to whole of life cover, even if capable of being ‘cashed in’, as its primary purpose is protection.

On investigation of the market, they were shown to be right. Whole of life policies with a surrender value are hardly ever sold, since the unit-linked (and with profits) policies that were so popular in the 1980s and 1990s fell out of favour. Regulatory change in 2013 made inclusion of surrender values commercially unviable. The declining number of policies in force also tend to have relatively low surrender values.

Simplification: Trusts of whole of life policies only become registrable if a surrender value is taken and retained in the trust.

HMRC guidance on the exemptions are available here:

Ruth Gilbert of Insuring Change

The views in the article are based on the author’s correspondence with HMRC and information in TRS Manual.

Special acknowledgement goes to Imogen Davies of Withers for raising the whole life issue with HMRC and the industry. She facilitated discussion of wider protection considerations with the help of several STEP members, and industry representatives who were instrumental in providing the relevant evidence to support the modifications of approach.

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