What is Relevant Life tax treatment?
Relevant Life Insurance is a policy set up for small companies to take out as a life insurance benefit for their employees. Over the last few years it has become more and more popular and with Aviva bringing out a critical illness option its become even more a popular replacement for personal life insurance. But what are the conditions that have to be met to qualify as relevant life and how does HMRC view the policy.
Conditions that have to be met to count as relevant life.
Employees and directors can take out Relevant Life Insurance, as long as the company agree to pay the premiums. But conditions do have to be met in accordance with HMRC.
- The life assured must be employed by the company taking out the policy and not be solely a shareholder. An employee would include directors on PAYE and salaried partners on PAYE. This would not include sole traders or anyone self employed as there would be no employer. Some companies will have their wife or husband as a shareholder. They will need to be a salaried employee in order to qualify for relevant life.
- Depending on where the policy is placed most providers will only accept new applications from employees of an employable age which ranges from 17 to 71. The policy must be taken out over a specified term which can not pass the age of 75. Relevant life is not available as a whole of life insurance.
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- The policy must have no surrender value or investment element and must be a pure protection policy.
- Any benefit payment must be paid via a trust to an individual (individuals) or nominated charity. The benefit is not for the use of the company and is intended for employees only. If you want a policy which pays to the company this would be key man insurance.
What are the tax benefits for the employee
The premiums are viewed as tax deductible for the employer by HMRC and not seen as a benefit in-kind for the employee. This of course means that the employee does not have to pay the premiums from their already taxed income. This is of course where big savings can be made for the employee against a personal policy.
Is the benefit pay out tax efficient too?
Relevant life insurance is set up using whats called a “discretionary trust” which means any pay out is a tax free lump sum. As the trust is outside of the estate the benefit amount is not subject to inheritance tax. Unlike group life insurance relevant life does not count towards an employees life time pension allowance which is currently capped at £1.000,000.
What are the tax benefits to the company?
The company owns the policy and pays the premiums. The company can claim these premiums as a cost and can be offset as long as its wholly and exclusively “for the purpose of trade” as part of the employee’s remuneration and that the benefit is not a business asset.
While we do give advice on relevant life insurance a life insurance product we are not qualified to give tax advice. Its always worth speaking to your accountant or a qualified tax adviser. There is limited information from HMRC but we can provide template letters for you to use if you want to write to HMRC to check your the tax position.
For those people who are looking for a quote on please go to our relevant life page 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.
Jody is the Managing Director and founder of My Key Finance Ltd. He has over 16 years experience as a protection adviser and is an authority within the UK business protection market. Jody has written articles for Business Matters Business Directory, and been featured in Forbes. As editor and Author of our blog Jody is hoping to educate and advise people with more in depth details and information on the various subject relating to the protection market.