Can you claim life insurance as a business expense?
Directors and business owners can run their life insurance through their company as a business expense. You can protect your business or your family, and claim back tax on your life insurance premiums.
How does it work?
Like most insurance policies there are different types of plans on offer.
This will depend on how much cover you need, how long you want it for and where you want the money to go.
Whilst some companies offer a benefit-in-kind it may not be enough to protect your family from financial hardship in the event of your death.
AND what can be more integral to your current finances – a benefit-in-kind needs to be declared on a P11D form which means you’ll be paying tax on the policy.
Relevant life cover or key man insurance can be a better alternative. Both of these policies are tax-efficient, but they work in different ways.
Life insurance to protect your business
Directors or business owners may want a life insurance policy to protect the business. For example, to insure a partner or a key employee in order to keep the business running in the event of their death.
In this instance, majority shareholders or partners can invest in shareholder or partnership protection. You can take out a policy on the life of a co-shareholder or, take out a policy on yourself.
If you’re taking out a policy on the life of a co-shareholder, the money goes back to the business. It’s typically calculated as the value of their share and can be split amongst the remaining shareholders to invest back into the business. The funds are then readily available to purchase the share back from the estate with the aid of a cross option agreement.
When you take out a policy on yourself, you choose your co-shareholders as the beneficiaries. Again, it is calculated on the value of the share, but it’s your share and they can split the value.
Unfortunately, these types of policies are not tax-efficient because the money goes back into the value of their business. Thus, HMRC determines that the policy doesn’t just help the business, but also adds to personal wealth and cannot be classed as a business expense.
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.
A key employee can be anyone who is crucial to the success of a business. So, this can include business directors as well as management staff or employees with specialist knowledge.
The business pays for the premiums each month and the policy is written in the name of the key individual.
Key man insurance can be an allowable expense, but only if you are not a majority shareholder.
(However, for business owners who are, whilst the premiums cannot be offset against corporation tax, the payout instead 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 the cost of the recruitment and replacement of the key member or cover loss of direct profits (for non-majority shareholders)
OR used to cover any outstanding loans written in the individual’s names and any lost goodwill (for majority shareholders).
The way that the business uses the money is the basis of what HMRC uses to determine the tax treatment of key man insurance.
Sole traders are also eligible to take out a key man insurance policy yet as the only owner of the business, the premiums are not an allowable expense. Although again, the payout is tax-free. It can still be an advantage, as you’re also not paying for your premiums out of your (already taxed) personal income. So you can still make savings.
If you’re still not sure how it works – key employee insurance for businesses can be a great place to read up on more information.
Protecting your family with a life insurance policy ran through the business
Key man insurance can be used to protect your family in some circumstances.
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.
BUT, the payment is then taxed just like normal income.
For business directors who are salaried employees of a limited company, relevant life cover could be a better option.
The benefits of relevant life cover
The main advantage of relevant life cover is that it is an allowable business expense. It works as a death-in-service benefit, but does not incur the tax penalties of a benefit-in-kind.
What’s the catch?
There must be an employer-employee relationship in order to receive the tax benefits.
As a salaried employee, the policy is viewed as remuneration for employment. It, therefore, serves a business purpose i.e. in employee retention and benefits.
In fact, all employees in the business are eligible for relevant life plans. Relevant life provides major advantages for small businesses who aren’t eligible for group life schemes. Particularly, for firms who may only have one or two directors. It allows them to provide a competitive benefit for their staff on an individual basis.
With relevant life, not only are the premiums an allowable expense that can be offset against corporation tax, but there is no need for the business to pay national insurance contributions either.
Additional advantages for your family
For the individual insured, a relevant life policy can have benefits too. Not only do they not need to pay for a life insurance policy out of their own pocket, but they don’t have to pay tax or national insurance on the premiums like they would on a benefit-in-kind policy.
One of the main benefits for the individual is that the policy is written into a trust.
This trust protects your family from paying inheritance tax, which means they receive the full payout.
What’s more, relevant life insurance is not included as part of your lifetime pension allowance either. Therefore, business directors with substantial pension pots can benefit further. They can leave money for their family, without paying a large amount of tax on a pension pot.
Every policy is treated differently by HMRC
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.
We always recommend speaking 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 definitely worth exploring your options.
Save money and claim life insurance as a business expense
By running a life insurance policy through the business, you can save money.
Key man insurance can help you save on corporation tax or tax on the payout, depending on how the money is used. And the benefits of relevant life insurance can save you huge amounts on tax.
If you’re looking for a tax-efficient life insurance policy, our partnered advisors can help you find the right solution. All our advice is fee-free and impartial to help you find the right solution for you and your business.