Relevant life policies for Company Directors
If you are a Company Director and pay for your own life cover, there is now an alternative that may save you money.
If you currently pay for your life cover from your own bank account you will be paying out of net income. If you pay for it from your business account you will probably be taxed on the payment as if it was income .i.e. a P11D. Large companies avoid this tax by providing life cover for employees through a registered group “death in service” scheme.
Standalone single life relevant life policies are an alternative way for directors to obtain tax efficient death in service benefits for themselves and their employees. They can also be used by members of group life schemes who want to top up their benefits beyond the scheme rules. Some group life schemes have very restrictive rules with regard to the amount of benefit that can be provided. They can also have restrictive definitions of remuneration, often discounting overtime, bonuses and dividends. A relevant life policy can be used to top up these benefits in a tax efficient way. However they are not suitable for the self-employed or equity partners or members, although their employed staff could be covered.
The policies can be set up on a single life basis, even for a one person limited company. Unlike a registered group scheme, these policies have no effect on the amount of money you can contribute to or accumulate in your pension scheme. Registered group schemes come under pension legislation and this means that any lump sum benefits paid on death are added to the employee’s pension funds when calculating the maximum allowance an individual can accumulate during their lifetime (currently £1.25 million 2014/2015). If this allowance is exceeded there is a tax charge of 55% on the excess. Relevant life policies are non-registered schemes and therefore avoid this tax.
Although the company pays the premiums, they are not normally assessable to Income Tax on the employee as a benefit in kind. This can be a significant saving, particularly for a higher rate taxpayer.
Premiums paid by the employer are not treated as a P11D benefit and there will be 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” as part of the remuneration of the employee, they will qualify for relief as a trading expense.
Benefits are payable free of Income Tax and are normally free of Inheritance Tax. Unlike lump sums paid under a registered group life scheme, relevant life policy benefits do not form part of the employee’s lifetime allowance for pensions.
The maximum cover the providers will normally accept is 15 times the employee/ director’s annual remuneration, depending on employees age at time of application. This can include salary, regular dividends paid in lieu of salary and any benefits in kind.
A relevant life policy can only include death benefits for the purpose of providing cover for the employee’s dependants payable before the age of 75. These benefits can be on a level benefit basis or an increasing benefit basis. With an Increasing benefit, the underlying rates of the life cover are guaranteed (i.e. the cost of the cover will not increase by claims experience) but the premiums and Life cover increase annually with the Retail Prices Index (subject to a maximum of 10%).
The plan must be written on a “life of another” basis with the employer as the plan owner and the employee the life assured.
There are restrictions in the legislation as to who benefits can be paid to. The use of the relevant life policy trust is the most practical way of ensuring these requirements are met. The trust is discretionary, allowing the trustees to be flexible in whom they pay benefits to. The employer is automatically a trustee and in all cases we recommend that the employee completes a nomination form to guide the trustee(s) as to whom they would like to benefit from the proceeds. This does not bind the trustees, but generally they should consider the employee’s wishes.
Having benefits paid through a trust ensures they cannot be taxed as part of the employer’s trading income, nor do they form part of the employer’s assets. Using a trust also ensures that in most circumstances benefits are paid free of Inheritance Tax.
The main purpose of the policy must not be for tax avoidance, if any doubts exist then the business’s accountant may be able to advise or seek clarification from HM Revenue & Customs. If a plan fails to qualify as a relevant life policy then the tax benefits will not apply.
If an employee leaves the employer the trustees could appoint, then assign the plan to the employee who could then continue the plan as personal cover. The employee would have to pay the premiums and would lose the tax advantages but cover would be retained. Alternatively the plan can be taken over by the new employer provided they agree to pay the premiums. This can be done by removing the original employer as a trustee and adding the new employer as both trustee and payer of the plan.