What do 2027 inheritance tax reforms mean for employers with group life assurance?

The Government's inheritance tax reforms due to take effect from 6 April 2027 have generated significant discussion across the pensions and employee benefits market.

Much of the discussion surrounding inheritance tax (IHT) reform, due to take effect 6 April 2027, has centred on whether death-in-service benefits could be affected.

Following consultation, the government confirmed that death-in-service benefits paid through registered group life schemes will remain outside the scope of the reforms. For many employers, this provides welcome certainty.

However, focusing solely on inheritance tax risks overlooking other important considerations. The interaction between life assurance benefits, pension wealth, employee circumstances and governance requirements means now is a sensible time for employers to review whether their current arrangements remain appropriate.

What do the 2027 reforms mean for employers?

The government's 2027 inheritance tax reforms prompted concerns that death-in-service benefits could be affected by changes to inheritance tax treatment.

Following consultation, the government confirmed that death-in-service benefits paid through registered group life schemes will remain outside the scope of the reforms.

This provides welcome certainty for employers using registered arrangements. However, it does not remove all potential tax considerations associated with group life assurance.

Why the conversation should not end with inheritance tax

Employers, however, should avoid treating this issue as resolved. The reforms have also highlighted the need to consider how life assurance benefits interact with pension savings, employee demographics and broader reward strategy.

For some organisations, the more significant consideration may not be inheritance tax itself, but whether existing arrangements continue to deliver the intended outcomes for employees.

5 questions reward and benefits leaders should ask

The 2027 inheritance tax reforms provide an opportunity for employers to reassess whether existing arrangements continue to meet their objectives.

Key questions include:

Are current arrangements still appropriate for your workforce?
Could the LSDBA (lump sum death benefit allowance) affect higher earners or senior employees?
Would an excepted arrangement provide greater flexibility for certain groups?
Is your current trustee structure creating unnecessary governance obligations?
Would a different governance model improve efficiency and reduce risk?

The overlooked impact of the LSDBA

Whilst lump sum payments from a registered group life scheme will not be subject to inheritance tax, they will still be subject to the LSDBA, currently £1,073,100.

Certain pension-related death benefits are tested against this allowance, and income tax charges may arise where benefits exceed the available limit.

Although this will not affect every employee, it highlights why employers should look beyond inheritance tax alone when reviewing group life assurance arrangements.

Which employee groups may warrant closer attention?

The LSDBA is particularly relevant for:

Senior executives
Higher earners
Employees with substantial pension savings
Employees receiving high multiples of salary as life cover
Those who have purchased additional cover through flexible benefits
Individuals with pension protections
Employees with wider estate-planning considerations

For employers with a significant population of higher earners, understanding the potential impact is becoming increasingly important when reviewing both benefits strategy and longer-term reward planning.

Why some employers are rethinking life assurance structure

Most employers provide death-in-service cover through either a registered group life scheme (RGLS) or an excepted group life policy (EGLP).

Because an EGLP sits outside the registered pension regime, it does not use any of an employee's LSDBA. This allows valuable life cover to be provided without affecting pension death benefit allowances.

As pension wealth becomes an increasingly important consideration for some employees, employers may wish to consider whether their current structure remains aligned with workforce needs.

Growing connection between reward strategy and estate planning

Pension wealth has become an increasingly important component of long-term financial planning for many employees, particularly senior executives and higher earners.

As a result, decisions relating to group life assurance cannot always be viewed in isolation. Employers may need to consider how life cover interacts with pension savings, reward strategy and broader financial wellbeing objectives.

This does not mean one approach will be suitable for every workforce. However, it does reinforce the importance of periodically reviewing arrangements as employee demographics and needs evolve.

Governance may be issue receiving less attention

Whilst it is a welcome relief that registered group life arrangements will sit outside the scope of the reforms, this does not remove all practical involvement for employers.

HMRC had been considering changes to the way in which death benefits under pension and group life arrangements would be reported and has since clarified that employers and trustees will not be brought into wider reporting obligations.

However, employers and trustees remain responsible for providing timely information to an employee's personal representatives.

This means governance and administration remain important considerations when reviewing existing arrangements.

Could governance models come under greater scrutiny?

As governance requirements evolve, some employers may wish to consider whether their current trustee structure remains the most effective approach.

For example, a master trust can significantly reduce the governance and compliance burden associated with a group life assurance arrangement because the third-party trustee assumes responsibility for many of the duties that would otherwise fall on employer-appointed trustees.

Potential benefits may include:

Reduced governance responsibilities
Lower administrative burden
Access to specialist trustee expertise
Greater operational efficiency
Reduced exposure to future reporting complexity

The suitability of any governance structure will depend on the needs of the organisation and its workforce.

Why expert support can add value

For many employers, the challenge is not simply understanding the legislation itself. It is determining what the changes mean in practice for their workforce, governance framework and long-term benefits strategy.

An experienced employee benefits consultant can help employers assess the potential impact of regulatory developments, identify which employee groups may be affected and review whether existing group life assurance arrangements remain appropriate. This can be particularly valuable where organisations are considering alternative structures, reviewing trustee responsibilities or assessing the implications of pension wealth and the LSDBA.

Final thoughts

The 2027 inheritance tax reforms have provided greater clarity for employers with registered group life arrangements. However, understanding how the changes interact with pension wealth, governance responsibilities and existing benefit structures can be more complex.

An experienced employee benefits consultant can help employers assess the implications for their workforce, review current arrangements and navigate evolving regulatory requirements with confidence.