Can you claim life insurance as a business expense?
If you’re a director of a company, it’s likely that you’ll want to invest in business life insurance. Whether it’s to protect your business or your family, you can get life insurance through the business. Some options are not tax-efficient, however, there are some life insurance policies that can be claimed as a business expense. HMRC views some policies as an allowable expense so that you can offset the premiums against corporation tax.
How does it work?
Like most insurance policies there are different types of plans that you can take out. This normally depends on how much cover you need, how long you want it for and where you want the money to go. Some companies offer life insurance as a benefit-in-kind, which is often not enough to protect your family. In addition to this, a benefit-in-kind needs to be declared on a P11D form, which means you’ll be taxed on it.
Whether you want to protect your business or your family, there are life insurance policies you can take out: relevant life cover or key man insurance. Both of these policies are tax-efficient, but they work in different ways.
When you want the money to go back into the business
Directors or business owners may also want a life insurance policy to protect the business. For example, against the death of a partner or a key employee in order to keep the business running.
Shareholder protection or partnership protection can help business owners. This is where you’ll either take out an own life policy or a life of another policy on your co-shareholders or partner. If you are a majority shareholder, then these types of policies are not deemed to be tax-efficient. This is because, in order to be a tax-efficient policy and claimed as a business expense, it needs to be ‘solely for the purposes of the business’. With major shareholders, the money goes back into the business they own. This creates a fine line between for business purposes or for the benefit of the individual because it technically adds to the value of the business.
How key man insurance can help
Key man insurance is available for both employees and business owners. This type of policy is designed for small businesses to protect them against the loss of a key member of staff. The business pays for the premiums each month, but the life of the individual is insured. Key man insurance can be an allowable expense if you are not a majority shareholder. However, for business owners who are, whilst the premiums are taxed the payout is tax-free. So either way, there are benefits.
Key man insurance pays the lump sum back into the business. This can be used to cover any outstanding loans written in the individual’s names. Alternatively, it can be used to cover the cost of the recruitment and replacement of the key member. The way that the business uses the money is the basis of what HMRC uses to determine the tax treatment.
For more information about it, we’ve got a great blog exclusively about key employee insurance for businesses. It runs through the policy in more detail so you can see if it’s right for you.
When you want the money to go to your family
With key man insurance, it is still possible to get the payout to go to your family. Once the business has made the claim and received the money to keep the business running, the lump sum could also be taken out as income and provided for the family. The payment is then taxed just like normal income. However, for business directors who are salaried by a limited company, relevant life cover could be a better option.
Relevant life cover
Relevant life cover is a tax-efficient policy for salaried directors and employees. There must be an employer-employee relationship in order to receive the tax benefits. Relevant life works as a death-in-service benefit but does not count as a benefit-in-kind. This is because it is viewed as remuneration for employees for their service, and therefore, is for the purposes of the business. In fact, all employees in the business are eligible for relevant life plans. It can be a great option for small businesses who are not eligible for group life schemes to provide a competitive benefit for their staff. Relevant life cover is a single-life insurance option so each individual can have their own policy.
Relevant life insurance is a great way to provide a death in service benefit for employers or directors without paying the benefit in kind tax. The premiums are an allowable business expense so can be offset against corporation tax. In addition to this, the business does not need to pay national insurance contributions.
Benefits for the individual
Relevant life policies benefit the individual too. As it is not classed as a benefit-in-kind, the individual is not taxed on the payout. No income tax or national insurance needs to be paid. The business pays for the premiums, but the money goes directly to the family.
As the policy is written into a trust, it also means the family do not need to pay inheritance tax on the payout.
Relevant life insurance is not included as part of your lifetime pension allowance either. Therefore, business directors with substantial pension pots can benefit. They can leave money for their family, without paying a large amount of tax on a pension pot.
Get tax advice
When it comes to tax-efficient life insurance policies, it’s really important that you don’t incorrectly deduct costs. This can cause tax implications later if you get it wrong, costing you more. It’s always best to speak to a financial advisor, do your sums and check with your local tax office before making assumptions on your life insurance and the tax rules. As a general rule, these policies are normally considered to be tax-efficient, so it’s worth exploring your options.
Save on costs by claiming life insurance as a business expense
By running a life insurance policy through the business, you can save money. With key man insurance, you can save on both corporation tax and national insurance. With relevant life, the family can benefit too by saving on inheritance tax. The individual doesn’t pay national insurance or income tax either.
For more advice on life insurance and whether it can be claimed as a business expense, get in touch with an advisor today. We offer free advice and quotes to find the best solution for your needs.