Relevant Life plans are the next generation of insurance that can save you up to 60% on the cost, if you’re a company director or key individual. It’s simply the most tax efficent way to provide financial security for your family.
no benefit-in-kind charge back to the company
no national insurance implications
tax-free benefits to your dependants
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Let the TAXMAN Pay For Your Life Cover – Here’s How
We’ve used an example of £1,000 a year for the life cover on an employee who is paying income tax at 40% and employee’s National Insurance at 2% (on top end of income). We’ve also assumed for this example that the employer is paying corporation tax of 20% (the small profits rate) and will pay employer’s National Insurance of 13.8% (the contracted-in rate).
Benefits for you
Available to companies of all sizes and on an individual basis, a Relevant Life Policy can help you:
Attract and retain the best staff
Reward your best people with great benefits
Make up to 60% tax savings on gross premiums when compared to a traditional Life Cover Policy – a tax-efficient way for you to arrange Life Cover for an employee
They are not suitable for the self-employed, equity partners or members of limited liability partnerships, although their employed staff could be covered.
Benefits for your employees
A Relevant Life Policy also has many benefits for your employees:
Like a ‘death in service’ benefit, it’ll pay an employee’s family a lump sum if they die during their employment.
It doesn’t count as a retirement benefit so it won’t affect their Lifetime Pension Allowance
If they leave the company, we’ll make it easy for them to take out their own policy with us – so they can ensure their cover continues.
Relevant life policies are non-registered single life death in service policies, which provide a lump sum benefit on the death of an employee outside of a registered group life scheme.Stand-alone single life relevant life policies are an alternative way for directors to obtain tax efficient death in service benefits for themselves and their employees. What are the advantages?
The policies can be set up on a single life basis, even for a one-person limited company. The benefit will not form part of the employee’s lifetime pension allowance
The payments will not form part of the employee’s annual pension allowance
The payments employers make are not subject to Income Tax or National Insurance because they are not normally assessable on the employee as a benefit in kind
These payments can be treated as an allowable expense for the employer in calculating their tax liability, as long as the local inspector of taxes is satisfied they qualify under the ‘wholly and exclusively’ rules.
In most cases the benefits are paid free of Inheritance Tax – provided the benefits are payable through a discretionary trust.
Who are relevant life policies suitable for?
Small businesses that do not have enough eligible employees to warrant a group life scheme. This could include a one-person company
High-earning employees or directors who have substantial pension funds and do not want their benefits to form part of their lifetime allowance
Members of group life schemes who want to top up their benefits beyond the scheme rulesThey are not suitable for the self-employed, equity partners or members of limited liability partnerships, although their employed staff could be covered.Are there any restrictions?The policies must:
Only provide for a lump sum death benefit payable before the age of 75
Only be payable to an individual or charity.The policies must not:
Provide any other benefit
Be capable of having a surrender value
Be used mainly for the purpose of tax avoidance
Tax treatment of premiums for an employee-owned and employer-paid life policy
If the employee owns the plan and the employer pays the premium, the payment by the employer will be treated as the employer meeting a pecuniary liability of the employee. This is where the employee has entered into a contract, which involves the payment of premiums, but the employer meets the cost on behalf of the employee. Therefore, the employee is liable to both Income Tax and employee’s National Insurance contributions on the premium. To provide the total cost of the plan, the amount of tax and National Insurance payable on the premium must be taken into account.The employer will usually be able to treat the gross cost as a trading expense, whether paid as salary or if the employer has paid the premium.
Tax treatment of premiums for a relevant life policy
The employer will set up the plan and pay the premiums. No Income Tax or National Insurance liabilities arise – if the plan meets legislative requirements to qualify as a relevant life policy.Provided that the local inspector of taxes accepts that payment of the premiums has been incurred ‘wholly and exclusively for the purpose of trade’, the employer may be able to claim Corporation Tax relief on the premium.
Relevant life policy trusts
A relevant life policy needs to be set up in trust . As the planshould not start until the trust form has been completed and accepted by the insurer
If the plan is placed in trust at a later date, once the plan has started, there may be a Capital Gains Tax liability in the event of a claim being paid.
The trust also demonstrates that the plan proceeds will be payable to individuals (the employee’s dependants) which is one of the legislative requirements to qualify as a relevant life policy.
The employer (as the settlor of the trust, known as the Principal Employer) will be a trustee. An additional trustee must be added to act with the employer. If the employee is to be the additional trustee,a further additional trustee should also be added to ensure that there would be two trustees available to act in the event of the employee’s death.
In addition to our administrative requirement that an additional trustee must be added when the trust is created, the trust requires there to be at least two trustees at all times, unless a corporate body is a trustee. An additional trustee may be a family member of the employee, such as a spouse, or perhaps an independent trustee, such as a solicitor.
The employee has power under the trust to change the trustees. Benefits are paid at the discretion of the trustees, who will decide which discretionary beneficiaries receive funds, when to pay and what amounts. It is possible for the employee to guide the trustees in their decision making and a nomination form is included in the trust to enable the employee to express their wishes. The nomination form does not bind the trustees, though it will usually be followed by them in making their decision.
: The trust includes a wide class of potential beneficiaries, known as discretionary beneficiaries. This includes the employee’s spouse, children and grandchildren.
The employee is also included as a discretionary beneficiary, to allow the trustees to assign the plan to the employee if he leaves the business. It is not recommended that the employer or a co-shareholder be added as a discretionary beneficiary (unless they are also a spouse or civil partner) as this may compromise the tax benefits of the plan.
If you’re considering something as important as life insurance for you and your family