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A tax efficient way for small businesses to provide death in service cover for their employees

Relevant Life Cover

Relevant Life Cover small business case study

The case study below is designed to illustrate some practical advantages offered by our Relevant Life Cover and potential tax savings. It shows how this policy could help your clients, but please note that this is an example only and is not based on a real company.

Amanda

Amanda
Business owner

AW Design Ltd.

Amanda is the sole shareholding director at AW Design Ltd and employs two designers, Leo and Sam. Amanda wants to provide life insurance for herself and her employees, but avoid the costs associated with group life schemes.

Leo and Sam

Leo and Sam
Employees

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The company takes out three separate Relevant Life Cover policies on the lives of Amanda, Leo and Sam and placed into discretionary trust.

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  1. One of the employees, Sam, is involved in an accident and dies.
  2. Sam’s family makes a claim under the Relevant Life Cover policy.
  3. LV= pay the proceeds to the trustees.
  4. The trustees pay the beneficiaries (Sam’s family) the proceeds.
  5. Because the policy was written in trust, inheritance tax doesn’t apply.

Background

Amanda Wilkins is the sole shareholding director of a small graphic design consultancy, AW Design Ltd. She works full-time, and employs two designers; who have both been at the company for a number of years. Amanda is proud of the business she’s built and values the roles that Sam and Leo have played.

Relevant Life Cover solution

Amanda feels that she should provide life cover for herself and her employees and speaks to her financial adviser who suggests that she considers LV= Relevant Life Cover for all three of them. The adviser also mentions that setting up a group life scheme would not be appropriate due to the administration costs involved and the size of the business.

All polices would be written in trust and Amanda, Sam and Leo would each name their beneficiaries. These are usually a next of kin. If one of them died whilst working at AW Design Ltd, the claim would be made by the assigned trustee and then paid to the named beneficiaries.

Costs breakdown

This is how the costs would work, assuming that the premiums qualify as an allowable business expense.

Cost type

Amanda

Leo

Sam

Monthly premium

£90.00

£65.00

£42.00

Employee National Insurance Contribution

N/A

N/A

N/A

Income Tax

N/A

N/A

N/A

Total company gross cost

£90.00

£65.00

£42.00

Less Corporation Tax (assuming 20%)

£18.00

£13.00

£8.40

Tax-adjusted total premium

£72.00

£52.00

£33.60

These figures are for illustrative purposes only. Tax calculations are based on 2016/2017 tax rules and may change in the future. The information assumes that the same rate of income tax/national insurance applies to the whole of the premium. It may be affected by individual circumstances.

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