Let the taxman help you – not himself
If you are a company director and pay for your own life cover, you could find getting your company to pay could save you a lot of money.
You may already be paying for your personal cover through your business, but it is likely these payments will be taxed as a benefit in kind. Relevant life policies avoid this.
Relevant life policies are a way of providing highly tax efficient death in service benefits on an individual basis for you and your employees, no matter how small your business is.
What are the advantages?
- 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.
- The premiums may be treated as an allowable expense for the employer in calculating their tax liability, as long as the local inspector of taxes is satisfied they qualify under the ‘wholly and exclusively’ rules.
- 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.
In most cases the benefits are paid free of Inheritance Tax – provided the benefits are payable through a discretionary trust.
Who are relevant life policies suitable for?
• Small businesses that do not have enough eligible employees to warrant a group life scheme
• High-earning employees or directors who have substantial pension funds and do not want their benefits to form part of their lifetime allowance
• Members of group life schemes who want to top up their benefits beyond the scheme rules
• They are not suitable for the self-employed or equity partners or members, although their employed staff could be covered.
Are there limits to the cover I have?
The legislation does have some limits to qualify for the tax concessions, and to ensure these are met:
• The cover must be paid in a single lump sum before the age of 75
• Only death benefits can be provided
• Benefits should be paid through a discretionary trust
• Beneficiaries should be restricted to family members and dependents.
Maximum amount of cover I could have?
• The maximum cover we will accept is 15 times the employee/director’s annual remuneration. This can include salary, regular dividends paid in lieu of salary and any benefits in kind.
How do I take out a relevant life policy?
Contact your financial adviser who will discuss the tax advantages and suitability with you in more depth and arrange for the appropriate documentation to be completed.
Advantages of a discretionary trust
• There are restrictions in the legislation as to who benefits can be paid to. The use of the trust is the most practical way of ensuring these requirements are met. The beneficiaries who could be included are usually family members and dependants.
• 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.
• The trust is discretionary, allowing trustees to be flexible in who they pay benefits to. However, the employee can advise the trustees of his or her wishes by completing a nomination form. Although this is not legally binding on the trustees, it helps to guide them.
• Using a trust also ensures that in most circumstances benefits are paid free of Inheritance Tax.
Talk to your financial Planner at Wades for more information on relevant life policies.