Save tax by changing your life insurance

Life insurance can now be set up in a way that enables it to be fully tax deductible.

Historically, life cover insurance has been difficult to justify as a “wholly & exclusively for business” expense and therefore has been difficult to classify for tax relief.

However, “relevant life cover” policies provide simple, stand-alone, single life, death in service (now, there’s a mouthful!) cover to small businesses without the typical tax issues.

Practically, realisation of such a policy, releases funds required for surviving working shareholders to purchase the shares from the deceased’s estate. Held in trust, the policy agrees to pay a lump sum to the beneficiaries (not the company) on either death or the diagnosis of a terminal illness whilst employed. The policy can therefore be provided for either shareholders or key employees, in real terms, so the business can continue operations.

There is a maximum cover, being the lower of £5m or 15x annual income. This needs some consideration when calculating to ensure it is stated correctly on application of the policy.

Benefits of this policy include:

  • The insurance premiums are tax-deductible
  • There is no taxable “benefit in kind” on the premiums paid
  • The employee receives the benefits free of tax charges
  • Typically, benefits are free of IHT
  • Any benefit paid is excluded from the employee’s lifetime pension allowance

It is also important to consider other policy structures in line with your own requirements;

Keyman insurance – usually qualifies for tax relief on the premiums however, pay-outs on the policy for the loss of a director of key employee are taxable on the employer.

Whole life cover – involves the company paying the premiums for a policy where the working shareholders insure each other. The premiums are subject to a taxable benefit in kind and employer NIC. However, payments on death are not taxable and the employer can benefit from tax relief on the premiums as part of a remuneration package.

All in all a complex matter that needs some professional, financial advice. Contact us to discuss your requirements further – Figurit can advise from a tax perspective and we have excellent contacts to organise any new policies.

T: 020 7376 9333

E: support@lansdellrose.co.uk