My Complete Guide to Relevant Life Policies
A few years ago the recently new Relevant Life Policy was launched. This offered a tax efficient way for company directors to pay for their own personal life insurance. Even though the policy has now been available for a while and other providers have followed Bright Greys lead many accountants and financial advisers are still not fully aware of the benefits that this policy can offer. For this reason this page breaks down everything you will need to know about the Relevant Life Policy. You can read the whole page or jump top specific areas using the menu to the right.
Introduction to Relevant Life Policies
Who Could Benefit –
Company Directors that currently pay for life insurance out of pre-taxed money could get their company to pay and therefore make a significant saving. Company Directors that currently let the company pay for life insurance and therefore get a P11D benefit could also switch to a relevant life policy to avoid the P11D benefit in kind charge.
Small businesses that want to set up a death in service scheme but do not have enough employees to qualify for a group life scheme can also benefit. The company can choose cover for all employees directors or a small selection of valued staff. New staff members can be added as and when they join the company.
Where employees have substantial pension funds and they don’t want the death in service benefits to form part of their pensions lifetime allowance. The premiums paid for the relevant life policy won’t impact the employee’s annual allowance either.
Where the employer wants to provide death in service benefits, which exceed the amounts provided by the main company scheme.
Relevant Life Policy Definition –
A single life death in service benefit policy. The policy has no minimum number of employees and can cover as few as one.
What Are The Benefits – Company Directors can save up to 49% by paying for their life insurance through a relevant life policy, compared to paying for the life insurance from pre-taxed income or through the company with a P11D.
Providers of Relevant Life Plans
There are now 7 providers that offer relevant life plans. I do not deal with all the providers but deal with a large enough number of providers to offer competitive premiums. Each provider has their own rules as to how much cover they will provide. Some offer as much as 25 times remuneration for younger clients, while others offer as little as 10 times remuneration for older clients. For the purpose of remuneration the insurers take into account both dividends and basic salary.
When only one provider Bright Grey existed then many clients and even life insurance experts thought that the government would stop directors taking advantage of this highly tax efficient way of providing life cover. However each new provider that has entered the market has spent considerable sums doing research to launch their offering and IT systems. Now this has been carried out by 7 providers I think it is safe to say the Relevant Life Policies will be here for the long term.
Useful Tools and Calculators
Tool 1 Maximum Assured Tool
The first tool will show you how much cover you can have. Different providers offer different maximum sums assured based on your remuneration. This tool will calculate the maximum sum you can have based on your age and remuneration. Alternatively feel free to contact me and I can get let you know which provider is best for you after checking your circumstances.
Tool 2 Relevant Life Savings Calculator
Another useful calculator that shows you how much you could save with a relevant life policy is the savings calculator. You can either click the image or this link to use the tool. You can slide the slider to what your premium would be and get specific figures about what you would save.
Example Relevant Life Cases
Example 1 Husband and Wife Limited Company Over the last few years I have advised clients on a lot of relevant life policies. I would say the majority of these are for husband and wife company directors of small limited companies. In the majority of cases the husband and wife already have life insurance paid for either from pre-taxed income from their personal bank account, or in other cases the limited company pays and the directors get a P11D benefit in kind for the premiums.
These directors tend to replace the existing policies with a more suitable term and larger sum assured. As the business pays for the policy with no P11D benefit in kind charge the actual saving to them is typically between 36% and 50% the actual saving depends on their tax band and whether they take mostly dividends or salary as their remuneration.
Example 2 Small Employee Death in Service Scheme
Many small businesses want to start a death in service scheme for either for all their employees or in the majority of cases for a handful of highly valued employees. Offering a death in service package is a good employee benefit and can help retain staff as well as attract good quality employees to join your organisation.
In cases like this each employees life needs to be fully underwritten. Therefore I need to communicate directly with the employee for most of the application process. I fill in the medical questionnaire and carry out a short fact find for the employee. I also do a short business fact find for the company. Paperwork is posted to the employee and some to the company. As there is no minimum number of employees and the premiums are deductible as a business expense I find that employers are keen to start this type of policy. When a new member of staff join the company their email is given to me and I get the policy set up independently with only minor participation from the company ie. just a couple of signatures.
Example 3 IT Contractor with Limited Company
Many IT contractors move from working from a permanent employed position to working through their own limited company. Previously with their employed position most would get a death in service benefit as part of their package typically 3 or 4 times their remuneration. Once they leave their position they lose this important benefit.
I therefore get a lot of enquiries from new contractors of various types including IT, Building Trades, Business Consultants etc. These clients typically want their businesses to pay for the death in service benefit that they have lost while setting up as a contractor. Established contractors often do not realise that they can get the company to pay for their life insurance and thus in many cases they are losing out by paying the premiums from the business account and getting a P11D charge or paying from their own income and paying from pre taxed income.
Tax Issues to Consider with Relevant Life Policies
Tax Areas to Consider
While dealing with relevant life policies for a number of years I have had accountants ringing me up on numeration occasions asking questions on how the policy works and is it legal etc. Many accountants cannot see how the policy can be used as a business expense and many still want to class the premiums as a P11D benefit. As a business protection adviser my responsibility lies in finding and advising on the most suitable product and tailoring the product to suit the particular needs of the client. Dealing with taxation issues is where accounts specialise and I leave that to them. However I have spoken to Scottish Provident and Bright Grey who gave me the text below to help explain the taxation issues surrounding relevant life polices in a language that accountants can understand.
Firstly Benefit in Kind
The issue of the company paying the premiums and not having them taxed as a benefit in kind on the directors. This is not a matter of discussion with the local inspector as the legislation (s247 FA 04) clearly removes this charge to income. The product works on this basis alone giving approximately a 1/3 saving in tax for a higher rate taxpayer in a 20% CT paying company.
Secondly Corporation Tax Relief
There is the issue of corporation tax relief on the premiums. This is where the “wholly and exclusive” rules come in and we cannot be 100% definitive. It is down to the accountant and eventually the local tax inspector should the accountant not be happy to claim the relief . Our opinion is, that as long as the policy can be shown to be part of the normal remuneration package of the employee it is “wholly and exclusively” for the purpose of trade, but we realise that some inspectors may wish to challenge this on the grounds that it is not necessary to provide such a benefit to secure the services of that employee, especially if they are also owners. But if you pursue that argument you would also disallow relief on salary and pensions! We would say that the benefit should be in line with the work done in the business, so a wife who does not actually contribute any significant amount to the business has an RLP then relief could be a problem on her – just as large pension contributions are related to the input / remuneration of the employee. However she can still have the policy and will still benefit from it not being a BIK.
The problem is, because this is a relatively new concept there is little or no guidance in the HMRC manuals so they have to be viewed under the same guidelines as registered schemes and pension payments. The normal guidance for key person cover, HMRC manual BIM 45525, only partially helps us as it deals with policies for the benefit of the company. However it does point us in the right direction under the heading of “benefits paid direct to employees” which refers us to the guidance for pensions under BIM 46000 onwards, in particular for directors, BIM 46035.
Many accountants I speak to are claiming the relief on the basis that (a) it is a legitimate part of the remuneration the same as pension contributions, and (b) it is unlikely HMRC would ever drill down that far to challenge it – after all we are dealing with fairly modest amounts of money in relation to overall turnover. Others will no doubt seek clarification beforehand – we have had little feedback on this yet, probably because it is a little early for returns to be made.
Thirdly The Sum Assured
The last issue is the sum assured. Because this is paid through the RLP trust outside of the company and directly to the beneficiaries there is no tax liability on the company, nor is there any income tax liability on the beneficiaries. No income tax charge arises on the beneficiaries unless the whole arrangement had been set up outside of the legislative requirements, and the insistence on the use of an appropriate trust are designed to ensure this does not happen.
The only possible tax that could arise is a periodic charge to IHT under the normal discretionary trust rules. This could only arise if death occurred just prior to a 10 year anniversary and the trustees were unable to distribute the assets from the trust in time. Could happen but unlikely. Max tax charge would be 6%. We are clear about this in the literature.
I would point out that RLPs are not substitutes for registered schemes. Registered schemes will normally be cheaper and have a slightly better tax treatment on claim in that there it does not come under the normal discretionary trust regime described above. RLPs are aimed to fill the gaps that Registered schemes don’t cover – especially on a single life and/or high earner basis.