Within the last 12 months a new type of life insurance called a “Relevant Life Policy” has been breaking onto the market. This product has to be very carefully set up to ensure it is done correctly and the full tax benefits received. The policy is designed to give directors and employees tax efficient life Insurance policy which can be paid by their Limited company with the beneficiary being a named person, usually a partner, child or family member.
Whilst many people will still take out death in service and normal life insurance, directors now have the opportunity to take out much higher sums assured and pay through their companies. Thus not having to pay their life insurance from their taxed income. Although relevant life insurance premiums can be a little more than normal premiums it can still save you up to 40% on your premiums (depending on your tax bracket).
Relevant life policies provide life cover for the benefit of employee's and director’s dependants paid through a discretionary trust. They are taken out and paid for by the employer.
Who is allowed to have a policy?
Any employee of a business, including directors. The business can be a limited company, a limited liability partnership, a partnership, a charity or a sole trader.
However, sole traders or equity partners or members cannot be the life assured.
'Salaried' partners (those who are not being taxed on trading income) can be covered.
Why are they tax efficient?
- Premiums paid by the employer are not treated as a P11D benefit and there will be no charge to Income Tax for the employee in respect of premiums.
- There are no National Insurance implications on either the employee or the employer.
- Subject to the local inspector of taxes accepting that the premiums are 'wholly and exclusively for the purpose of trade' they may qualify for relief as a trading expense. It is difficult to be precise on this, as different inspectors and accountants may have different views. We are not aware of any HMRC precedent.
- Premiums do not count towards the annual pension allowance for tax purposes.
Benefits
- Benefits are payable free of Income Tax.
- Benefits are normally free of Inheritance Tax. In specific circumstances there could be a periodic tax charge on the trust. For full details on this see the 'Trust' section below.
- Unlike lump sums paid under a registered scheme, relevant life policy benefits do not form part of the employee’s lifetime allowance for pensions. There is a limit (£1.5 million for tax year 2011/2012) that you can accumulate over a lifetime in your pension 'pot'. Any lump sum payments (as opposed to dependant's pension) under a registered scheme fall into this pot and any payments to the estate in excess of this are taxed at 55%, so a relevant life policy may be a useful vehicle for high earners to opt out of a group life scheme.
Using our experience over the last 2 years we can best provide you with a quote and service that best looks after your interests. Please don't hesitate and contact us now for further information