Relevant Life Insurance

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What is Relevant Life Insurance?

A relevant life policy is a tax efficient method of buying life insurance through your company. We offer comprehensive advice on relevant life insurance and are independent relevant life insurance advisers. A relevant life policy is a life insurance applied for by an employer on the life of a single employee. It pays out a lump-sum to the employee’s dependents in the event of the employee’s death. Relevant life policies provide life cover for the benefit of employees’ dependents and directors’ dependants paid through a discretionary trust. They are taken out and paid for by the employer and provide death in service benefits without a group life scheme. Allowing small businesses to offer death in service benefits to their employees. A relevant life policy can offer significant tax benefits for employer and employee. Relevant life policies are governed by the same legislation that deals with group schemes – the Income Tax (Earnings and Pensions) Act 2003. However, unlike most large employer-provided schemes they are ‘non–registered’, so are not subject to tax in the same way as registered group life schemes.

What is the target market for a relevant life policy?

The following three groups are the principal buyers of relevant life insurance policies: Small businesses that would like to be able to offer death in service benefits to their employees but have too few members for a group scheme. High earners who do not want their death in service benefits to count towards their lifetime pension allowance. Employees who are looking to top up the death in service benefits they receive from their employer’s registered group scheme.

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Who is allowed to have a relevant life policy?

Any employee of a business, including directors, is allowed to have a policy. The business can be a limited company, a limited liability partnership, a partnership, a charity or a sole trader. However, sole traders or equity partners or members cannot be the life assured. ‘Salaried’ partners (those who are not being taxed on trading income) can be covered.

Why are relevant life policies tax efficient?

Premiums paid by the employer are not treated as a P11D benefit, and there is no charge to Income Tax for the employee in respect of premiums. There are no National Insurance implications on either the employee or the employer. Subject to the local inspector of taxes accepting that the premiums are ‘wholly and exclusively for the purpose of trade’ they may qualify for relief as a trading expense. It is difficult to be precise on this, as different inspectors and accountants may have different views. We are not aware of any HMRC precedent. Premiums do not count towards the annual pension allowance for tax purposes. Benefits are payable free of Income Tax. Benefits are usually free of Inheritance Tax. In particular circumstances, there could be a periodic tax charge on the trust. Unlike lump sums paid under a registered scheme, relevant life policy benefits do not form part of the employee’s lifetime allowance for pensions. There is a limit (£1.25 million for tax year 2014/2015) that you can accumulate over a lifetime in your pension ‘pot’. Any lump sum payments (as opposed to dependant’s pension) under a registered scheme fall into this pot and any payments to the estate in excess of this are taxed at 55%, so a relevant life policy may be a useful vehicle for high earners to opt-out of a group life scheme.

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What restrictions are there on relevant life insurance?

To qualify for a relevant life policy and become eligible for the associated tax benefits there are certain legislative requirements the plan has to meet: It must provide only lump-sum death benefit. No disability, critical illness or premium payment benefits are allowed. The term cannot exceed the 75th birthday of the employee. No surrender value is allowed – Self-Assurance plans do not have surrender values. Benefits must be payable to an individual or charity, or to a trust for the benefit of an individual or charity. The plan must be written under a Relevant Life Policy trust to ensure this requirement is met. It must not be set up for tax avoidance purposes. For this reason, the employer should not be included as a discretionary beneficiary.

What type of lump sum death benefit can be written in a relevant life insurance policy?

The death benefit can be level, decreasing or increasing cover.

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How much cover can be provided by a relevant life insurance policy?

The statutory limits on the amount of cover that can be provided have been removed. However, different insurers have different financial limits on the cover; such as 15 times the annual remuneration of the employee if they are aged 40 or older or 20 times annual remuneration for individuals aged up to 39. Remuneration can include salary, bonus and regular dividends paid in lieu of salary plus any taxable benefit in kind. There may be no need for financial underwriting up to £1.5 million for each employee depending on the insurer. Above that, the insurer may need a completed financial questionnaire. The insurer may also require proof of earnings. This could be a copy of a P60 or 3 monthly salary slips or a letter from the employer confirming income. For a small company, they might require external confirmation from the accountant or copies of the accounts to show dividend income.

Can different benefits be provided?

A relevant life policy can only include a death benefit. Multiple death benefits with different terms and/or sums assured can be included within a plan, provided they are all for the purpose of providing cover for the employee’s dependents. You cannot use the same plan for other purposes, for example, a key person or ownership protection benefits.

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How does a relevant life policy trust work?

A relevant life policy trust is a discretionary trust. It usually includes a pre-printed list of potential beneficiaries that includes the spouse, civil partner and any children of the employee. Non-family members, such as an employee’s live-in partner or a charity could be added. The employer is automatically a trustee, but at least one additional trustee must be added. We normally recommend that additional trustees are officers of the company (director/company secretary/co-partner or member) to reinforce the commercial aspect of the arrangement. The employee can be an additional trustee, but if this were the case a further additional trustee would be required in the event of the employee’s death (unless a corporate body is a trustee). For single person companies with no company secretary, the additional trustee will usually be an external person. It could be a spouse or the company’s accountant or solicitor. On the death of the sole director, the trustee duties of the company will have to fall onto the executors or administrators of the estate who will either carry out those duties or appoint someone else. In all cases, we recommend that the employee completes a nomination form to guide the trustees as to who they would like to benefit from the proceeds. This does not bind the trustees, but they should generally consider the employee’s wishes.

Relevant life policy trust taxation

In exceptional circumstances, an inheritance tax periodic charge could be levied on any assets in the trust on the 10-year anniversary of the date the trust was created. For this to happen, the member must either have died and the benefit paid is still held in the trust at the 10-year anniversary, or the member may be gravely ill at the 10-year anniversary, and the policy is still held in trust. The charge would be a maximum of 6% of the assets in the trust in excess of the nil rate band (£325,000 2014/15). If a 10-year charge arises, there could also be exit charges when assets are distributed to the beneficiaries. This could be up to 6% if the assets remain in the trust for the next 9-plus years. However, assuming benefits are paid out just after the anniversary the charge should be insignificant. It is unlikely that these charges will apply in the vast majority of cases.

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Can the relevant life policy trust be incorporated with a will trust?

It is possible to nominate a will trust, such as a spousal bypass trust, as a potential beneficiary. The employer can add the bypass trust to the list of potential beneficiaries when completing the trust form. Alternatively, the employee could nominate that trust using a nomination form.

Is there a replacement policy option?

There is no need to have a replacement policy option. If an employee leaves to join a new employer, the plan can continue to be held in trust. The original employer could retire as a trustee, and the new employer could be added as a trustee. The new employer would then take over payment of the premiums and provided that the legislative requirements are still being met, the plan should continue to qualify as a relevant life policy. If the employee leaves the business and the plan is no longer intended to be used for death in service benefits, it is possible for the employee to take the plan with them and maintain the cover as personal protection. The employee would take over payment of the plan and could even put it into a personal trust if they choose to.

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