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Business Protection

Tax treatment of Business Protection policies

Business owners are keen to understand the tax treatment of Business Protection premiums and proceeds, but the rules aren’t always straightforward. We've highlighted below the main areas for you and your client to consider.

Key Person Cover

HM Revenue & Customs (HMRC) provide guidelines helping establish whether your client will receive tax relief on the 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. Therefore, 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%) and
  • The insurance is intended to protect profit (not capital or debt) and
  • The policy is annual or short-term*
  • * In BIM45525, HMRC clarified this by confirming that in order to qualify the policy should only be in force for as long as the key person is crucial to the business. For example, if the key person is a project manager in charge of a project lasting eight years, the policy would be written with an eight year term.

    Proceeds tax treatment

    Generally, if tax relief is given on the premiums then the proceeds will be taxed, however 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.

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    Please note: Your client’s accountant in consultation with the local inspector of taxes, should advise them on whether or not any premiums qualify for corporate tax relief. Tax relief should not be a priority when putting cover in place. The purpose of Key Person Cover is to protect the business’ profits or debts against the unexpected loss of key person due to death or on diagnosis of a critical illness.

Share and Partnership Protection policies

Share and Partnership Protection proceeds have a number of different tax issues to 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. Normally for these types of policies premiums are paid for by the individual shareholder or partner. Tax relief is not usually available on the premiums for this type of cover.

Inheritance tax

When implementing a cross option agreement, 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.

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Please note: Your client’s accountant in consultation with the local inspector of taxes, should advise your client on whether or not any premiums qualify for corporate tax relief. Whether or not tax relief is given on the premiums should not be a priority when putting cover in place.

Relevant Life Cover

Premium and Proceeds tax treatment

Relevant Life Cover premiums can count as a tax-deductible expense; inheritance tax isn’t usually paid on the proceeds as the policy is written in trust.

HMRC usually treat the premiums as an allowable business expense (so not included as a P11D benefit), providing the local Inspector of Taxes is satisfied they qualify under the ‘wholly and exclusively’ rules. This means the premiums and benefits usually qualify for relief on: Income tax, Capital gains tax, Corporation tax and National insurance.

Green information icon

Please note: Your client’s accountant in consultation with the local inspector of taxes, should advise your client on whether or not any premiums qualify for corporate tax relief. Whether or not tax relief is given on the premiums should not be a priority when putting cover in place.

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