Tax Issues to Consider with Relevant Life Policies
3 Tax Areas to Consider
While dealing with relevant life policies for a number of years I have had accountants ringing me up on numeration occasions asking questions on how the policy works and is it legal etc. Many accountants cannot see how the policy can be used as a business expense and many still want to class the premiums as a P11D benefit. As a financial adviser my responsibility lies in finding and advising on the most suitable product and tailoring the product to suit the particular needs of the client. Dealing with taxation issues is where accounts specialise and I leave that to them. However I have spoken to Scottish Provident and Bright Grey who gave me the text below to help explain the taxation issues surrounding relevant life polices in a language that accountants can understand.
The issue of the company paying the premiums and not having them taxed as a benefit in kind on the directors. This is not a matter of discussion with the local inspector as the legislation (s247 FA 04) clearly removes this charge to income. The product works on this basis alone giving approximately a 1/3 saving in tax for a higher rate taxpayer in a 20% CT paying company.
There is the issue of corporation tax relief on the premiums. This is where the “wholly and exclusive” rules come in and we cannot be 100% definitive. It is down to the accountant and eventually the local tax inspector should the accountant not be happy to claim the relief . Our opinion is, that as long as the policy can be shown to be part of the normal remuneration package of the employee it is “wholly and exclusively” for the purpose of trade, but we realise that some inspectors may wish to challenge this on the grounds that it is not necessary to provide such a benefit to secure the services of that employee, especially if they are also owners. But if you pursue that argument you would also disallow relief on salary and pensions! We would say that the benefit should be in line with the work done in the business, so a wife who does not actually contribute any significant amount to the business has an RLP then relief could be a problem on her – just as large pension contributions are related to the input / remuneration of the employee. However she can still have the policy and will still benefit from it not being a BIK.
The problem is, because this is a relatively new concept there is little or no guidance in the HMRC manuals so they have to be viewed under the same guidelines as registered schemes and pension payments. The normal guidance for key person cover, HMRC manual BIM 45525, only partially helps us as it deals with policies for the benefit of the company. However it does point us in the right direction under the heading of “benefits paid direct to employees” which refers us to the guidance for pensions under BIM 46000 onwards, in particular for directors, BIM 46035.
Many accountants I speak to are claiming the relief on the basis that (a) it is a legitimate part of the remuneration the same as pension contributions, and (b) it is unlikely HMRC would ever drill down that far to challenge it – after all we are dealing with fairly modest amounts of money in relation to overall turnover. Others will no doubt seek clarification beforehand – we have had little feedback on this yet, probably because it is a little early for returns to be made.
The last issue is the sum assured. Because this is paid through the RLP trust outside of the company and directly to the beneficiaries there is no tax liability on the company, nor is there any income tax liability on the beneficiaries. No income tax charge arises on the beneficiaries unless the whole arrangement had been set up outside of the legislative requirements, and the insistence on the use of an appropriate trust are designed to ensure this does not happen.
The only possible tax that could arise is a periodic charge to IHT under the normal discretionary trust rules. This could only arise if death occurred just prior to a 10 year anniversary and the trustees were unable to distribute the assets from the trust in time. Could happen but unlikely. Max tax charge would be 6%. We are clear about this in the literature.
I would point out that RLPs are not substitutes for registered schemes. Registered schemes will normally be cheaper and have a slightly better tax treatment on claim in that there it does not come under the normal discretionary trust regime described above. RLPs are aimed to fill the gaps that Registered schemes don’t cover – especially on a single life and/or high earner basis.