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Tax Treatment

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. Whether or not tax relief is given on the premiums should not be a priority when putting cover in place.

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*.

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.

* 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.

Take a look at our full list of trust documents

Share and Partnership Protection

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.

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.

Learn more about trusts

If you would like to know more about trusts, visit our literature library or go to:

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Liverpool Victoria Financial Services Limited, registered in England with registration number 12383237. County Gates, Bournemouth, BH1 2NF, UK