Where your company pays for life insurance, it usually results in a tax bill on the cost of premiums, any policy pay-out or both. But if you’re willing to accept one or two limitations there’s a completely tax-free alternative. What is it?
The first port of call if you want insurance cover for the loss of a director or key worker is typically keyman insurance (KI). This pays out on death and usually critical illness, and where your company pays the premiums:
- it can, subject to one or two restrictions, claim a Corporation Tax (CT) deduction for the cost of these; but
- it will be liable to pay CT if and when it receives a payout on the policy.
Whole life option
As an alternative to KI, each director-shareholder could take out whole of life insurance on each other and arrange for their company to pay the premiums. This type of policy doesn’t provide cover for critical illness, but on the plus side when it pays out on death it isn’t taxable. Where your company pays the premiums for a whole of life policy this counts as a benefit in kind (BiK) for you, on which you’ll be liable to pay tax. On top of this your company will also be liable to pay NI at 13.8% of the premium amount.
So with either KI or whole of life insurance there can be a tax charge. But with a relevant life policy (RLP) the position can be far more favourable, even where the company pays for it, because the:
- premiums are CT deductible for your company
- payouts aren’t subject to CT
- premiums don’t count as a taxable BiK for you.
There are limits on the amount of cover you can have with RLPs. The maximum payout is the lesser of £5,000,000 or 15 times your annual income. There are other conditions that apply, but these shouldn’t cause you any problems.
While RLPs can only pay out to individuals and not companies, this is perfect for the job of providing the surviving shareholders with funds to pay for shares owned by the executors of a deceased colleague. RLPs can be written in trust. This means any payout will bypass the policyholder’s estate and so legitimately avoid IHT. Usually, the insurers have a standard document for this, but make sure that you ask before you sign up. This makes an RLP an all round winner when it comes to tax efficiency.