Save tax with a relevant life policy
Relevant Life policy tax treatment
Relevant life policy tax is a much-discussed topic in the insurance industry. Particularly, because it can help businesses save money on their life insurance. If you’re still unclear about how it works or whether a relevant life policy is right for you, then this overview may help to make things a little clearer.
What is relevant life cover?
We’ll start with the basics of what a relevant life policy actually is. Essentially, a relevant life policy is a life insurance policy taken out by a business on the life of an employee. It is similar to a death-in-service benefit that companies have offered in the past.
This type of policy is popular amongst small businesses because it allows them to take out individual policies on their staff. Before the introduction of relevant life, small businesses were unable to insure their staff on a group scheme and, therefore, had to opt for a more expensive option.
The benefits of a relevant life policy
The main attraction of a relevant life policy is its cost-effectiveness. The relevant life policy tax treatment helps businesses save money whilst offering a competitive benefit to attract high-calibre employees.
It enables smaller businesses to invest in life insurance for their employees without having to enter into a group life scheme. It also enables salaried directors to benefit from the cost-effectiveness of a life policy.
How does a relevant life policy work?
A relevant policy is a life insurance policy for employees. The premiums are paid for by the business itself, but the payout goes towards the employee’s chosen beneficiaries, normally a spouse and/or any children.
The business will need to apply for the policy, but information will be required from the insurance provider regarding the insured individual’s health and lifestyle. Premiums will be based on the age, health, height, weight, smoking status and medical history of the individual insured.
How does relevant life policy tax affect businesses?
The tax treatment of a relevant life policy is what attracts companies to this type of policy. As the business pays the premiums, the policy can be run through as a business expense. Therefore, relevant life can be offset against corporation tax.
No national insurance is required to be paid on the policy either. This means businesses can actually save a substantial amount of money on such a policy.
What about for the employee?
As the premiums are tax deductible for the business, a relevant life policy is not seen as a benefit-in-kind, which normally come with a hefty tax bill. They also don’t have to pay for the premiums out of their taxed income, as the business is paying for the policy.
In addition to this, the major benefit for the employee is that the payout is tax-free. Therefore, their family can receive more of the money when a claim is made.
Offsetting inheritance tax
In order to benefit from further tax relief, a relevant life policy is written into a trust. This means the policy doesn’t fall into the lifetime pension allowance and is classed separately to the estate. On an estate above £325,000, an inheritance tax bill of 40% is required to be paid. Therefore, the payout can be used to counteract any tax that the family would pay on the estate too.
Can anyone take out a relevant life policy?
Essentially, to take out a relevant life policy, there needs to be an employer-employee relationship. Business directors who own shares are, therefore not able to benefit from a relevant life policy. However, if directors or partners are salaried employees then they can invest in a relevant life policy.
What other conditions need to be met?
Relevant life is a term life insurance policy, meaning it has to be taken out for a set period of time. This means there is no cash value benefit. With additional investment or cash value, the policy would no longer meet the conditions to be tax efficient.
The main requirement for relevant life policy tax treatment is that the policy is paid for by the business and goes towards the individual’s beneficiaries and not towards the individual themselves or taken as income. As the policy is written in a trust and is part of the business benefits package, HMRC allows tax-efficiency.
HMRC’s treatment of relevant life policy tax
Whilst HMRC supports the tax-efficiency of relevant life cover, they treat each case individually. You should always seek advice from the tax-office or a financial advisor to make sure that relevant life policies are taken out under the right guidance.
Can I get a relevant life with critical illness policy?
Up until recently, it wasn’t feasible to get a relevant life policy with critical illness. This is because the payout was then seen to go towards the individual and would, therefore, be treated as income. Thus, the relevant life policy tax benefits would be lost.
In 2016, Aviva launched a relevant life with critical illness policy which came under much scrutiny from other insurance providers. It was never really clear how the terms met the HMRC guidelines giving cause for concern.
Despite this, Aviva kept the product but relaunched it in 2018 as a relevant life with employee significant illness cover instead. Therefore, it is possible to get a relevant life with critical illness policy. The policy just differs slightly from traditional critical illness cover. Instead, more serious illnesses are only covered such as heart disease and advanced cancer. Partial payments have also been removed. What’s more, the illness itself would need to lead to early retirement from the current role the employee would be working in. They can return to work in a different capacity, however.
It’s up to you whether you would prefer this type of policy to benefit from the tax-efficiency. Or, if you would prefer to take out a separate critical illness policy to protect yourself against more conditions.
How to get relevant life insurance
You can obtain relevant life insurance from any insurance broker or provider. It’s always best to look around to find the best policy and price that suits you and your business. To get a free quote and compare policies, contact us or fill out a quote form today.