Key Man Insurance Taxation

Key Man Insurance HMRC Taxation

How do HMRC treat the Taxation of Key Man Insurance?

The tax treatment of key man insurance is not absolute and straight forward for every company. Below we go through the details set out by HMRC and look into the reasons it can be offset and why in some circumstances it might not. We always suggest that companies speak with your local tax office or your accountant for the latest information as these rules can change.

We are the only UK website where you can quote and apply online for key man insurance. Go here to compare quotes and get covered today!

Key person insurance is taken out by a company on an individual within the company. The company, therefore, owns the policy and will be the beneficiary of and claim. The premiums are paid by the company and are tax deductible as long as the reasons for cover fit certain criteria which in most circumstances it will.

The main principles of key man insurance taxation were set by the then Chancellor of the Exchequer in 1944. In answer to a parliamentary question Sir John Anderson made the following statement:

“Treatment for taxation purposes would depend upon the facts of the particular case and it rests with the assessing authorities and the Commissioners on appeal, if necessary, to determine the liability by reference to these facts. I am, however, advised that the general practice in dealing with insurances on the lives of employees is to treat the premiums as admissible deductions, and any sums received under a policy as trading receipts, if (i) the sole relationship is that of employer and employee; (ii) the insurance is intended to meet loss of profit resulting from the loss of services of the employee; and (iii) it is an annual or short term insurance. Cases of premiums paid by companies to insure the lives of Directors are dealt with on similar lines.”

So provided that the company is taking out a policy on its employee, the insurance is for loss of profits resulting from the loss of that key employee and the insurance policy is the annual or short term, then the company may be allowed tax relief on the premium. In the past, most key person policies have been taken out over a 5 year period in order to fit this criterion but is believed that this is no longer the case and 10 and 15-year policies are also now allowable.

How is Keyman Insurance Taxed ?

The taxation of keyman insurance is all down to the rules set out by HMRC. It can be very complicated!

The two most common questions we are asked regarding key man insurance tax treatment are:

  • Can the premiums be off set against corporation tax? – Yes, they can.
  • Is a lump sum benefit tax-free – It’s paid tax-free to the company. It’s then liable to tax like any other amount of money within a company.

For 90% of people this will be all you need to know, but for those who like more detail behind our simple answers, you are welcome to indulge below. Otherwise why not just get a quote now.

Click here to get a quote for key man insurance – we won’t be beaten on price!

health insurance

HMRC also stated the below:

health insurance

“An employer may take out in his own favour a policy insuring against loss of profits resulting from the death, critical illness, sickness, accident or injury of an employee, director or other ‘key person’.”

Premiums on a key person policy will be allowable if all the following conditions are met:

  • The only reason of the key person insurance is the purpose of replacing a loss of income resulting from a loss of works from the key person. But not including a capital loss to the company.
  • Insurance must be term insurance providing cover for their person or person’s only during the term of the policy and only while the person is working for the employer.

Therefore a whole of life insurance would probably not qualify as tax deductible as the policy will likely out last the person’s usefulness to the company. It’s possible that whole of life insurance may be suitable to shareholder protection policy as the person will possibly hold on to the shares even after they have left the company. It’s unlikely though from the guidelines that this will qualify for tax relief.

From the guidelines, it seems fair to suggest that if tax relief has been allowed on premiums then the proceeds could be taxed. But it’s also fair to suggest that tax treatment of proceeds of benefit will be treated differently depending on the judgement of the local tax inspector. It’s a suggestion that a certain amount of benefit is accounted for to cover any tax liability from a pay-out so as not to fall short of company requirements.

Can you take out Key Person protection on a majority holding director?

It’s possible to take out this insurance but as the director is the majority shareholder it may be seen that he or she will benefit most from any pay-out (especially if critical illness is included) and therefore not necessarily be given tax relief.

health insurance

Add Ons

My Key Man

Inheritance tax problems

Any cash paid to a company will increase the value of that company and of course the shares. This will in turn increase the value of the shareholders estate. If shares are passed to anyone other than the wife or husband of the person who dies inheritance tax could increase.

Taxation for Shareholders

According to HMRC’s Business Income Manual at BIM45530:

“Where the key person is a director whose death would significantly affect the value of shares in the company, one of the purposes for taking out the policy may be a non-trade purpose of protecting the value of the director’s shares and therefore the value of their estate … [and are] not paid wholly and exclusively for the purposes of the company’s trade”

Those with 5% or less of a shareholding may may be able to negotiate with HMRC, but anything more than this is normally seen as a trading receipt and therefore the pay-out will be taxed as well.

As mentioned above this information should only be used as a rough guide for tax treatment. We strongly recommend that you speak to a tax advisor or tax expert to find out what your liabilities are. Of course you can always check out the HMRC website for the latest information key man insurance taxation.

For those people who are looking for a personal tax efficient life insurance you may want to consider a relevant life policy or just give us a call on 020 7112 8844.

Information regards to taxation levels and basis of reliefs are dependent on current legislation. Individual circumstances are not guaranteed and may be subject to change. The Financial Conduct Authority do not regulate trusts.

Our Customers Love Us!

Our Customers Love Us!

  • Simple and Low Cost

    Everything was made very easy to understand. The quotes were the cheapest we found too. Very happy!

  • Excellent Service

    Everything was made very easy. It was great Jody.

  • The only place we would go for key man insurance!

    Great prices and good advice, what more could you want.

  • Recommended!

    A very good service thanks...

  • Excellent service with easy to understand explanations

    Jody Pearmain of Keyman was very helpful in explaining options and I thoroughly recommend his company

  • Good for key man insurance

    Great service and easy to understand. Would use again.

  • Fantastic!

    Over and above what we expected. Thanks!

  • Would recommend!

    Did everything we wanted very well. Decent price and made easy..

  • We received a wonderful service from…

    We received a wonderful service from mykeyman and will be using them again. The service and product knowledge from team is excellent. Everything was made easy to understand. The price was the best we found too.

  • The services received was great

    The services received was great. Many thanks to these professionals at mymainsurance. I will definitely use them again.

  • First Class Service

    The standard of service from MyKeyMan was first class. They kept me up to date with progress on my Relevant Life Policy, followed up promptly following delays caused by my medical practice being slow in compiling reports, and responded instantly and clearly to any questions I had.