If you’re a company director and you have life cover to protect your family, you could be paying more tax than you need to.
Relevant life policies are a way of providing death-in-service benefits on an individual basis no matter how small the business.
Thanks to a specific exemption in tucked away in the Income Tax (Earnings and Pensions) Act 2003, specifically s.307, a correctly drafted life policy will qualify not only for corporation tax deductions but escape any charge to income tax and national insurance.
What is a Relevant Life and Critical Illness Plan?
It offers a tax effective way for an employer to arrange life and critical illness cover on the life of an employee, and may be a Director, with the benefit payable to the employee or their next of kin.
It is designed to provide individual life and critical illness cover for an employee whilst they are employed. The chosen lump sum will be paid out if the employee dies or suffers a terminal or critical illness during the length of the policy.
How is the plan set up?
It is a single life policy, which can include terminal and critical illness cover.
The employee is the person covered (life assured).
The employer is the policy owner.
The employer pays the policy premiums, during employment, these payments are tax deductible.
The policy is written under trust from the outset, using a Discretionary Trust, which means that it will benefit the person covered and/or their family and financial dependants.
How much cover can I get?
A multiple of the earnings, including dividends, up to 25 times depending on age
What are the likely tax benefits?
Relevant Life Plans are similar to most other types of life cover except they aim to offer a tax efficient way for an employer to arrange life cover benefits for an employee, including Directors. As such, Relevant Life Plans are usually viewed as an allowable business expense by HMRC so all premiums and paid benefits qualify for full Income Tax, National Insurance and Corporation Tax relief.
This means premiums could be reduced by up to 49% compared to a typical life policy if you are a higher rate taxpayer.
For a basic rate taxpayer this figure could be up to 40%.
What are the likely benefits of the plan in a Discretionary Trust?
Inheritance Tax – It should help to ensure that any money paid out from the Plan would not be part of the estate of the person covered, helping to minimise Inheritance Tax.
Quicker payout – It should help to ensure that the money paid out can be paid to the right people quickly, without the need for lengthy legal processes, such as needing to attain Grant of Probate.
This process takes time and if they die without having made a will, the process will take longer. Since the trustees are the legal owners of the policy, a payment can be made to them directly following a successful claim.
Control of funds – A trust can control when the money from the Relevant Life Plan will be paid out. This can ensure that children receive some financial support from the money, but do not have full access to it.
Flexibility of beneficiaries – Using a trust allows some flexibility on who will benefit from the policy.
If you are looking at taking life cover, contact us today. We have in house IFA’s who can work with you to draw up cover that is both competitive and tax efficient.
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