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Get Tax Relief and Life Cover all-in-one with a Relevant Life Policy!

If you are a director of your own company, your life cover could provide tax benefits while giving you the peace of mind knowing that your family would be provided for should the worst happen. You could also provide life cover for your employees – even if you only have a few.

If you currently pay for your life cover from your own bank account you will be paying out of post-tax income, and if you pay for it from your business account you will probably be taxed on the payment as if it is income.  Larger companies avoid this tax by providing life cover for employees through a registered group ‘death in service’ scheme.

You can take advantage of the tax benefits available to larger companies by taking your life cover out through a ‘relevant life policy’.  These can be written on an individual basis so are available to all companies, no matter how small. 

What is a relevant life policy?

A relevant life policy is an alternative way of providing a lump sum on death for an individual, without the need to set up a registered group life scheme.

What does a stand-alone single life policy do?

The aim of the policy is to provide a lump sum benefit on the death of an employee. This removes the need for the company to set up a registered group life scheme. The policy is designed to meet the requirements of a single life relevant life policy under S393B (4) (b) of the Income Tax (Earnings and Pensions) Act 2003.

Who are relevant life policies aimed at?
The policy is aimed primarily at 2 groups:

• High-earning employees who have substantial pension funds and don’t want their death-in-service benefits to form part of their lifetime allowance.

• Small businesses that don’t have enough eligible employees to warrant a group life scheme.  Relevant life policies can also be used by directors of the company.

 

What are the advantages?

Provided the arrangement meets the criteria below, a relevant life policy has a number of advantages:

• The benefit won’t form part of the employee’s lifetime pension allowance.

• The premiums paid won’t form part of the employee’s annual allowance. The annual allowance is the amount that can be contributed by, or on behalf of an individual to any registered pension scheme with the benefit of tax relief. So the employee is still able to make full use of their annual allowance to make contributions to a registered pension scheme.

• Premiums paid by employers are not normally assessable on the employee as a benefit in kind so they’re not subject to income tax.

• Premiums paid by employers are not normally assessable for employer or employee National Insurance contributions.

  • s247 of the Finance Act 2004 omits Part 6 of the Income Tax (Earnings & Pensions) Act 2003,  Chapter 1.

  • This means payments by an employer for a non registered death-in-service plan on the life of an employee are no longer treated as employment income, where previously the payments would have been taxed as a benefit in kind. As the premium is not treated as employment income, there will be no charge to income tax or National Insurance.

• The premiums may be treated as an allowable expense for the employer in calculating their tax liability provided that the local inspector of taxes is satisfied they qualify under the ‘wholly and exclusively’ rules.

• Provided the benefits are payable through a discretionary trust, in most cases the benefits are paid free of inheritance tax as the payment is not part of the employee’s estate. But the trust will be subject to normal inheritance tax rules for discretionary trusts, which in some circumstances may give rise to the following charges:

  • Up to 6% of the value of the trust fund on each 10th anniversary of the date the trust was established (the periodic charge). A periodic charge will only apply if there is a value held in the trust at the 10th anniversary. This could happen if, for example, the employee dies shortly before the 10th anniversary and the benefits have not been distributed to the beneficiaries.

  • Up to 6% of the value of the fund on appointment of benefits out of the trust to a beneficiary (the exit charge).

How do I qualify for a relevant life policy?

The policy must meet the following rules to qualify as a single person relevant life policy:

• The policy must only provide for a lump sum death benefit payable before the age of 75.

• No other benefit must be conferred under the policy.

• The policy must not be capable of having a surrender value. There are circumstances in which a small surrender value is allowed, but under most plans no such value will arise.

• Any benefit must only be payable to an individual, or a charity. This can be payable through a trust and to maximise the tax efficiency of the policy we recommend that the policy is issued under a discretionary trust from outset. We can provide specimen wording.

• The main purpose of the policy must not be tax avoidance.

How do I set up a relevant life policy?

The employer will apply for a Business Protection Menu plan on the life of the employee. The plan must only include Life Cover.

What term can be chosen?

You can choose any term from one year up to a maximum of 40 years. But the term of the plan must end before the 75th birthday of the employee for the plan to qualify as a relevant life policy.

What is the maximum amount of cover?

You can apply for any amount of cover up to the lower of £5,000,000 or 15 times the annual salary of the employee, including P11D benefits. If the employee is also a shareholder any dividends they receive can also be included in this amount. This is equivalent to providing up to 4 times salary as death-in-service benefits and up to 11 times salary as a lump sum to buy an annuity as an alternative to a widow’s or dependant’s pension. Financial underwriting may be required.

For advice and/or to arrange a relevant life policy or other forms of life cover, email Marc Stemmer at Re Financial Planning or call him on 020 8458 7427.

Re-Financial Planning Limited, the financial planning division of Glazers, is authorised and regulated by the Financial Services Authority.

Glazers Chartered Accountants is regulated by the Institute of Chartered Accountants in England and Wales for a range of investment business activities.