What is a relevant life policy?

It is individual life cover that a company buys for an employee, usually a director of a small company with no group scheme. The company pays the premiums and the policy is written under a discretionary trust.

The conditions it has to meet

A capital sum on death before an age no higher than 75.
No surrender value, beyond a return of unexpired paid-up premiums.
No other benefits, although ill health, disablement and accidental death benefits during service are permitted.
Beneficiaries limited to individuals and charities, or trustees holding for them.
Tax avoidance must not be a main purpose of the arrangement.

Who can and cannot have one

Salaried directors and employees: The cover has to be provided by an employer for an employee, so a director on the payroll qualifies.
Not sole traders: A sole trader is not an employee of anybody, so there is no employer to provide the cover.
Not equity partners or LLP members: For the same reason. Personal life cover is the route for them.
Not a replacement for a group scheme: Where a company has enough employees, a group life scheme is usually the simpler arrangement.

How it is taxed

Premiums are normally an allowable business expense for the company, subject to the wholly and exclusively test that applies to any employee cost. HMRC publishes no guidance specific to these policies, and it looks closely at cover arranged for directors who are major shareholders but not for other staff.

For the employee, the premiums are normally not treated as a taxable benefit in kind. HMRC's own wording is that an exemption may apply depending on the circumstances, so confirm it for your own arrangement.

Because the policy is held in a discretionary trust, the proceeds do not normally form part of the employee's estate.

A sole trader is not an employee of anybody, so there is no employer to provide the cover.

Where this fits

Your accountant should be in the room for this one, because the company's tax position and yours are both involved.

Death in service and relevant life cover Get a complimentary health check

The advisers for this subject

Sunny Bharj

Independent Financial Adviser

Tony Springer

Independent Financial Adviser

Advising through Equity & General Financial Services Limited, which is authorised and regulated by the Financial Conduct Authority. Check the firm on the FCA register under number 474163.