Originally posted by Craig at Nixon Williams
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To help accountants understand, we’ve clarified the machinations of the policy and put together these explanations that talk in their language.
Benefit in Kind and Corporation Tax Relief
When pensions were simplified, the premium for this type of protection was removed from “charge to income”. In other words, it does not count as taxable income.
Rather, higher rate taxpayers could greatly reduce their tax liability, assuming that their company pays 20% Corporation Tax.
The Relevant Life policy benefits from the “wholly and exclusive” guidelines. Interpreted for the layman, this means that there’s a level of ambiguity, thus the premium cannot be earmarked as 100% definitive.
Insurers take the stance that, providing the policy can be proven to contribute to the employee’s remuneration package, said policy becomes “wholly and exclusively” a business transaction.
Relevant Life is still relatively new to market, so there’s little guidance in existing HMRC manuals to add clarification, either. As a result, Relevant Life policies and their premiums are viewed in the same light as registered schemes and pension payments respectively.
HMRC guidance for keyman/person cover, dealing with insurance deductions for employees and key personnel, only hints at what we can deduct, as it tackles the issue solely from the company perspective.
What that manual does do, however, is point us in the right direction with “benefits paid direct to employees”. It documents much of HMRC’s guidance for pensions, with a manual of its own for company directors’ and shareholders’ contributions.
The result is that many accountants we speak to claim relief on the basis that:
it’s a legitimate part of the remuneration, the same as pension contributions;
it’s unlikely HMRC would ever investigate to this minutia level to take you to task.
The Sum Assured
The final surmountable barrier is the sum assured and how it doesn’t attract tax. But this is more easily explained, certainly in a language that both accountants and the layman will understand.
Relevant Life Policies are paid out through the trust nominated at the policy’s inception and goes directly to the beneficiaries. As such, the company faces no tax liability.
Neither is income tax due from the beneficiaries unless the arrangement somehow breaches the legal requirements. As the policy can’t be created without nominating an appropriate trust, the legal boundaries must be upheld to even get the ball rolling.
This combination makes a Relevant Life policy an extremely tax-efficient way for company directors and contractors to save during their lifetime and protect their loved ones should the worst happen.
If they still don't understand after reading the above, then you need to change accountants!
John Yerou
MD of Freelancer Financials
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