Relevant life policies have become available to employers to provide a tax-efficient death in service benefit for employees. This type of policy is designed so smaller businesses can provide an attractive employee benefits package that is tax-efficient.
Relevant life policies were introduced in the last few years to replace death in service benefits as a benefit-in-kind. Traditionally death-in-service benefits were taxable and would have to be declared on a P11D form. These benefits also caused problems for high earners as it would count towards their pension pot and would, therefore, be heavily taxed.
Relevant life cover provided a solution to this and this type of policy has a much more attractive tax treatment.
Premiums can be offset as a business expense
A relevant life policy is paid for by the employer and offered to salaried employees. As the business pays for the premiums, they can be offset as a business expense as long as the policy is ‘wholly and exclusively for the purpose of trade’.
What does that mean?
To explain it in relevance to relevant life policies, it means the employee is receiving remuneration for their employment. As such, relevant life policies are used to attract and retain quality employees and provide an appealing benefits package whilst that employee is working at the company.
Therefore, the premiums can be offset against corporation tax, making the policy a cheaper option for smaller businesses.
Relevant life policies on a single life basis
One of the other main benefits of a relevant life plan is that it can be written on a single life basis. Group life schemes cannot be written on this basis, and therefore, most group providers rarely have a policy that suits smaller businesses. A relevant life policy can help smaller businesses or companies with perhaps one or two directors who have a policy they pay out of their own post-tax income.
Relevant life cover does not count towards the lifetime pension allowance
A high earning employee with a substantial pension pot will benefit from taking out a relevant life policy. Relevant life policies are traditionally written into a trust, and therefore, do not form part of the lifetime pension allowance. The premiums also are not included in the annual pension allowance.
Traditionally death-in-service benefits were included in the lifetime pension allowance which currently sits at £1.75 million. So high earners may go over the threshold with a death in service benefit and they could be facing a nasty tax bill.
Relevant life policies solve this problem and provide a much more attractive option than group life schemes or a personal policy.
Relevant life is written in a discretionary trust
A relevant life policy is taken out under a discretionary trust where the policyholder can name their beneficiaries. This can be a spouse or family member or any range of potential dependants. The policyholder also appoints a trustee, who is responsible for overseeing the payments of the life insurance policy.
One of the benefits of a discretionary trust is that it can be flexible. Meaning that you can add or take away beneficiaries depending on your change of circumstances e.g. additional children or grandchildren.
However, the benefits are paid at the discretion of the trustees. Policyholders can make an ‘Expression of Wishes’ which can help guide the trustees. This does allow for last-minute changes if you are unable to adapt your policy before you pass away.
Benefits are free from income tax and inheritance tax
When your policy is written into a discretionary trust, the benefits can then be paid free of income tax. The lump sum then received by your beneficiaries is not taxed upon payout. In addition to this, the payout is free of inheritance tax too. Allowing your family to receive the amount you intended.
This can be used to support them financially, but also can be used to counteract potential inheritance tax paid on the estate.
A relevant life policy is transferrable
In the event that the employee leaves the business, the policy can be transferred provided that the new employer is willing to accept the plan. Alternatively, the employee can keep the policy as a personal one. In this instance, the policy then loses its tax benefits, but it can still be placed under a personal trust and will, therefore, be free from inheritance tax.
Relevant life policies for ‘salaried’ employees
Relevant life policies are aimed at company directors who have personal life insurance but are paying through pre-taxed income or getting a P11D benefit-in-kind tax penalty. It is also an attractive option for small businesses who can offer it as part of an attractive benefits package without paying for a group scheme.
In order for a relevant life policy to be taken out on behalf of an employee, they must be a ‘salaried’ employee. Therefore, the policy is not suitable for sole traders or equity partners. Instead, key man insurance may be a more viable solution.
Avoiding tax avoidance
HMRC treats the tax rules of relevant life policies differently based on the circumstances. However, one of the main requirements is that tax avoidance is not the main purpose of taking out the policy. The policy should be for the genuine benefit of the business and the employees’ beneficiaries. In this instance, there is unlikely to be a problem regarding the tax treatment and HMRC will grant tax relief.
Relevant life policies are specifically designed for small businesses who are unable to benefit from group life schemes. They are also attractive to high earning directors who wish to have an individual policy paid through the company. Providing life cover for employees is a valuable benefit and can help your business stand out when hiring suitable candidates. The single life relevant life policy can be a really useful tool for businesses.
To find out more, get in touch with us today to speak to an advisor.