Tax Treatment:

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Tax treatment and Business Protection

The decision over tax relief on premiums should not be a priority when putting cover in place. Your client’s accountant will advise them if premiums qualify for corporate tax relief.

Key Person Cover and tax treatment

HM Revenue & Customs offer guidelines on whether your client will receive tax relief on premiums, and if the proceeds would be treated as a trading income.
The tax treatment for setting up a policy to cover loss of profits and a policy to cover repayment of a debt can be very different. It’s important that these are always set up as separate policies.

Premium tax treatment

Current guidelines state that tax relief may be given on the premiums if:

  • The life insured is an employee (or minority shareholder with a share of less than 5%).
  • The insurance is intended to protect profit (not capital or debt).
  • The policy is annual or short-term. In BIM 45525, HMRC clarified that in order to qualify, the policy should only be in force for as long as the key person is crucial to the business.

Proceeds tax treatment

If tax relief is given on the premiums then the likelihood is that proceeds will be taxed, but this may not always be the case:

  • Under the ‘Anderson’ guidelines (BIM 45525) HMRC state ‘no assurance can be given that any future receipt will be excluded from trading income even though the premiums are not allowable'.
  • In short, if the cover is set-up to protect profits, HMRC normally consider the proceeds as usual business profits or trading receipts.

Share & Partnership Protection

Share & Partnership Protection proceeds have a number of tax issues you should be aware of:

Premium tax treatment

  • If the premiums are paid for by the business they will be taxed as a P11D, benefit in kind for the relevant individual.
  • Normally for these types of policies premiums are paid for by the individual shareholder or partner.

Inheritance tax

  • When implementing a shareholder/partnership arrangement, each policy would usually be written in trust for the benefit of the other partners/shareholders.
  • This means that the benefit would be payable to the trustees and not to the estate or other partners /shareholders.

Executive Income Protection

Premiums

The premiums paid by the policyholder/employer should not normally be treated as a P11D expense for the employee. 

For the employer, the premiums should normally qualify as a business expense, provided that the employee/person insured doesn’t have a controlling financial interest in the business, and that premiums are paid by the business for the purposes of the businesses financial protection.

This is based on our current understanding of the HMRC guidelines and should be checked by the policyholder, their financial adviser and their accountant with their local HMRC office.

Claim payments

In the event of a valid claim, benefits paid under Executive Income Protection will be treated as a trading receipt. The benefit will also be treated as a trading expense when it’s used to fund sick pay for the employee, resulting in a neutral tax position. 

The main benefit should normally be passed on to the employee through PAYE after deduction for Income Tax and National Insurance. The business will also need to pay employer’s National Insurance Contributions and continue to fund any pension scheme contributions in respect of the employee’s salary.

 

Relevant Life Cover

Relevant Life Cover premiums are normally treated as an allowable expense for the employer.

For the life assured, the premiums are not treated as taxable remuneration and therefore do not attract for income tax or National Insurance. Under current legislation any proceeds sits outside the life assured's estate for inheritance tax purposes.
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More on trusts

If you’re looking to learn more about trusts, see our Trusts and Business Protection or:

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