Financial Planning

Get Life Cover for Free! (well almost...)

Everyone should review their Life Insurance Cover regularly. Not only regarding the amount that is insured, but also how it is being paid for and whether it is written in Trust. Writing a policy in Trust properly will ensure that the proceeds are paid directly to your beneficiaries outside of your estate. This means there is no need to wait for Probate, and the funds are not subject to Inheritance Tax at 40%!

For many people, life cover is an essential piece of personal financial planning.  If you work for a larger employer, you may get Life Cover as a benefit through a Group benefit scheme.  This is worth reviewing every year.  Make sure you have filled in your Expression of Wishes as this allows the Trustee to pay the benefits to your beneficiaries outside your estate (read on to discover what this is important!!)

What if you are a small business owner?  What is available to you?

If you are a director of a small company and you are currently paying for your life assurance out of your own pocket or through your Directors' Loan Account (which is all subject to Income tax and National Insurance), there may be a better way.

Using a Relevant Life Policy (RLP) can be more cost-effective to purchase life insurance.  An RLP is basically a death-in-service plan that is set up and paid for by your employer, or company if you are a director.

How could a Relevant Life Policy save you money?

  • The premium payments are not treated as a benefit in kind, so there is no income tax to pay
  • National Insurance is not assessed on the premiums for either the employer or the employee.
  • Unlike Group Schemes, the benefit received from an RLP will not form part of your lifetime allowance.
  • Premiums will not count towards your annual pension allowance for tax relief purposes.
  • The premiums may be fully deductible for Corporation tax.  If the amount of cover and premium meet the Wholly and Exclusively Rule, the benefit can considered a part of a Director's/Employee's remuneration.  
  • The policy will be written in a Discretionary Trust.  This both meets one of the conditions to qualify as a RLP and ensures that any distributions will not form part of the employee's estate.  (The Trust will be subject to normal inheritance tax rules which means there may be a 10th anniversary or an exit charge in certain circumstances).

Are you interested now?

How does the Websters approach support Business Owners?

We do more than compliance work...  We support Business Owners by taking the time to understand their needs and find solutions to issues that keep them awake at night.

In this case, where an Account Manager has identified a need for insurance, they will team up with our experienced in-house tax advisers and financial advisers to ensure the size of the policy is appropriate.  This increases the probability of the expense being allowed for Corporation Tax purposes.  As there is no official HMRC guidance or precedent that we are aware of at the time of writing, this is a judgement call based on experience.

Our tax and financial advisory team is also available to collaborate with external accountants to provide this service to their Business Owner clients.

A worked example

Premium of £1,000.   Assume 40% taxpayer paying 2% NI on higher income, and 19% Corporation Tax relief is available on the RLP.  

Cost of £1,000 Premium Paid out of Pocket Paid by Company (RLP)
Gross Salary £1,724 N/A
Income tax at 40% £690 N/A
National Insurance at 2% £34 N/A
Employers NI at 13.8% 238 N/A
Total Gross cost £1,962 £1,000
Corporation tax relief at 19% £373 £190
Net Cost £1,589 £810

Why should you ensure your Life Policy is written in Trust?

If your estate is large enough to need a Grant of Probate or Letters of Administration, it can take quite a long time for these to be granted.  Trustees of a policy can pay to beneficiaries pretty much immediately, ensuring the policy funds get to those who need them in a timely manner.  As a side benefit, when paid this way, the proceeds do not form part of your estate, so the fund are paid out free of any tax!  

In sum, your beneficiaries get the funds faster, and they get to keep all of the money.  Why would you NOT do this?

What is a Relevant Life Policy?  The science bit...

There are some qualifying rules.

  • The policy can only provide Life Cover (no other benefits)
  • The employee cannot be over 75 when it pays out
  • There should not be a surrender value to the policy
  • The policy can only pay out to an individual, a charity or a Trustee.  (Thus a Discretionary Trust is set up at the start of the policy)
  • The plan should not be used to avoid tax

For referring Accountants:

The legislation can be found in ITEPA 2003 s 393B(4), and parts of ITTOIA 2005 s480 s481 s482.  RLPs were created when the Pension Simplification Legislation came into force on 6 April 2006.  So, they are treated like a pension contribution in that they are a part of a remuneration package, but are not taxable.  BIM46030 and BIM46035.

These policies may not be suitable for Sole Traders.  

Key Man Insurance  - where the payout goes to the Business, is a different product.