Relevant Life Policies - A director's dream when it comes to life cover

The Tax Advantages of Relevant Life Policies for Business Owners

Most, if not all, directors look for ways of paying for things in a tax-efficient manner, using their business rather than their personal pocket when allowable.........and why wouldn't they?

Well, Relevant Life Policies (RLPs) offer business owners a tax-efficient way to provide life insurance for employees and directors. These individual policies, paid for by the business, provide a lump sum to the family of the insured employee/director if they die whilst employed by the company, in much the same way as larger businesses often provide death-in-service cover for employees.

Here’s a concise guide to their benefits and the legislation behind them.

Key Benefits of Relevant Life Policies

1. Tax Efficiency:

• Corporation Tax Relief: Employer premiums qualify as a tax-deductible business expense if they meet HMRC requirements, which they invariably do when advice has been taken.

• No National Insurance: Premiums are not a benefit-in-kind on the employee meaning it saves both the employee and employer from National Insurance contributions.

• Inheritance Tax-Free: Benefits are paid via a discretionary Relevant Life Trust, keeping them outside the estate. Using Multiple Trust Planning, as discussed in the previous blog, you can also avoid any periodic charge which could otherwise become payable when dealing with cover amounts in excess of the IHT nil-rate band threshold.

• No VAT: Premiums are VAT-free.

There's not many things which can be more tax efficient!

2. Employee Perks:

• No impact on take-home pay, unlike personal life insurance.

• Portable policies that can transfer with the employee. This can be ideal for business owners whom set up limited companies for short-term ventures, such as property developers.

Legislative Framework

To maintain tax advantages, RLPs must comply with:

• Income Tax (Earnings and Pensions) Act 2003: Most insurers limit benefits to those on death or terminal illness to avoid being classified as a benefit-in-kind, however, Aviva introduced Relevant Life Cover with ’significant illness cover’, providing benefits in the event of death or diagnosis of a listed condition which is expected to cause early retirement. The policy must also end before age 75, not accrue a surrender value and cannot be for the purpose of tax avoidance which, for example, would be the case if directors took the cover out for the purpose of buying each others shareholding in the event of the other director dying.

• Inheritance Tax Act 1984: Utilising Trust structures make payouts exempt from inheritance tax (IHT).

• Corporation Tax Act 2009: Premiums must be “wholly and exclusively for trade” to qualify as a deductible expense. Since the provision of the cover is to provide the employer with a death-in-service benefit, to be left to their family or a charity via a Trust, it complies with these rules.

Who Benefits?

RLPs are ideal for:

• Directors wanting tax-efficient personal life insurance.

• Small- to medium-sized businesses that don’t require group life cover.

Restrictions

• Limited to employees, including directors; shareholders without employment roles are excluded.

• There must be a clear employer/employee relationship so they are not available to partners or sole traders, only directors or other employees of a business.

• Cover is often capped at a multiple of salary (e.g. 15-25 times annual earnings) although some insurers will allow up to £1,000,000 of cover for those with little to no evidence of earnings.

Why Consider RLPs?

Relevant Life Policies combine financial efficiency with employee support. They save taxes, enhance benefits packages, and protect families.

Not only that, they move expenditure from the personal pocket to the business pocket for the small business owner, in a totally allowable way!

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