What is Relevant life insurance?
Companies who are big enough and meet eligibility criteria, can use a registered group scheme to pay for their employees’ life cover. Though these group schemes are tax-efficient for its members, directors of smaller businesses were missing out as group schemes required a minimum of 5 members to qualify. Relevant Life Insurance was introduced in 2006 to provide a solution for smaller businesses.
Relevant life insurance is an insurance policy that a business can take out to provide life insurance for an individual director or employee. It is a death-in-service plan set up and paid for by the business; however, not for the benefit of the business, rather for the benefit of the employee/director.
Benefits of a Relevant Life Policy
- The business owns the policy and so pays the premiums which are considered a tax allowance expense. The business therefore saves 19% corporation tax.
- The employee or director does not have to pay any income tax as there is no benefit-in-kind value attached to these premiums.
- The policy is written to trust from the outset, so it pays out a lump sum to the employee or their beneficiaries if they die or are diagnosed with a terminal illness while employed during the policy term.
- Unlike registered group schemes, the benefit does not form part of an employee’s lifetime pension allowance. Also, the premiums do not form part of an employee’s annual allowance for pensions either.
How is it tax-efficient for the employee?
Before the introduction of Relevant Life, sole director companies and other smaller businesses, who were not eligible to operate a group scheme, were paying for their personal life policies through the business account. This meant that they became liable to pay National Insurance and Income Tax.
Under Relevant Life, HMRC usually views the premiums as an allowable business expense for the employer and not a benefit-in-kind (BIK) for the employee, and so the employee does not have to pay Income Tax or National Insurance on the premiums. For a higher or additional rate taxpayer, this can be a significant saving.
How is it tax-efficient for the business?
Your company can claim tax relief on the premiums as these will be an allowable business expense. Therefore, your company will save 19% corporation tax on the monthly premiums. In addition, the benefits are written into trust on behalf of the employee, so they are not viewed or taxed as business assets.
How a Relevant Life policy can cut a company’s costs**
Ordinary life cover £1,000
Relevant life plan £1,000
|Company gross cost||Employee’s National Insurance contribution at 2%||£34||Nil|
|Income tax @ 40%||£690||Nil|
|Employer’s National Insurance contribution at 13.8%||£238||Nil|
|Total gross cost||£1,962||£1,000|
|Company net cost||Corporation tax relief at 19%||£373||£190*|
*Assumes that corporation tax relief is 19% and has been granted under the ‘wholly and exclusively’ rules. In both cases, we’ve assumed payment of £1,000 each year for the life cover on an employee who’s paying income tax at 40% and employee’s National Insurance at 2% on the top end income. We’ve also assumed that the employer is paying corporation tax at the small profits rate of 19% and will pay the employer’s National Insurance at the contracted-in rate of 13.8%.
** Table and tax example are taken from Royal London (article reference: P9B0076)
Policy is written to a Discretionary Trust
Relevant life policies are written to a discretionary trust from the onset. This is because it is a legal requirement that any benefits paid are for the benefit of the individual.
Characteristics and Benefits of Trusts
- Inheritance Tax: Since the proceeds get paid into a trust, they do not become part of the estate of the life assured and are therefore not subject to Inheritance Tax.
- Speed of Payment: There is no need to wait for a grant of probate for the policy proceeds to paid out. There is therefore no delay in the trust receiving the proceeds of the policy.
- Trustees: Trustees are the legal owners of the trust and can be family members or friends of the life assured. They are responsible for making decisions on how and when the beneficiaries are paid. They are therefore in control of how the policy proceeds are used within the trust.
- Beneficiaries: These can be the life assured, immediate family members and descendants and/or any individual or UK registered charity nominated by the life covered.
- Periodic Charges: On the 10th year anniversary of creating the trust, if the value of the trust fund is higher than the nil rate band for the trust at that time, an inheritance tax charge will arise on the excess. If this is the case, there will be a charge of up to 6% on the value of the assets in excess of the nil-rate band. However, it is unlikely that such a charge will arise in the vast majority of cases. The most likely cause would if just before a 10th year anniversary, the unforeseen happens and the employee dies, and there wasn’t enough time to pay the assets out to the beneficiaries.
- Exit Charges: When the trustees pay money from the trust to the beneficiaries, an exit charge may apply which could be as much as 6%. However, where assets are paid out as soon as possible following a claim, there’s unlikely to be any significant exit charge.
Any references to tax treatment are based on WIS Accountancy’s understanding of legislation and HM Revenue & Customs practice at the time of writing this article. Both of these are likely to change in the future, and a liability to tax may arise under an existing arrangement. The tax treatment will depend on the individual circumstances of the person receiving the benefits.