Relevant life insurance for company directors

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Relevant life insurance is a fixed term, death in benefit insurance policy that you take out through your company which pays out a tax-free lump sum on the death of the person insured.  It is suitable to put through your company if certain conditions are met and hence benefit from further tax savings on the premiums.  Some of the conditions that need to be met include:

  • You can only take a policy that covers the death of the director and not critical illness or disability.

  • You will also have restrictions on the amount of life cover you takeout.  This is typically 15 times the amount of you remuneration, but more details on this can be found when you contact the insurance company or your financial adviser.

In the past, relevant life insurance would not cover companies that had less than five employees but now even sole directors with no employees, can take out this policy and benefit from the tax savings it gives.   The savings you can benefit from include:

  • Savings in corporation tax as it is counted as a business trading expense if the conditions for relevant life insurance are met to pass the ‘wholly and exclusive’ business expense test.
  • No national insurance liability for the employer or the employee as it is an expense paid by the company and does not affect the payroll or the P11d.
  • There is no effect on your personal tax liability as it is not counted as a benefit in kind.
  • The lump sum benefit, if it ever matures will also be tax-free if you set it up in a relevant life trust.  Any claim that is made will go directly to your chosen beneficiary without the need for a probate, and it is outside your estate, so there is no inheritance tax on it either.

When you take out a relevant life insurance, you can potentially save up to 52% if you are in the higher rate tax band or 36% if you are in the basic rate band.  For example, if your life insurance came to £100, it would cost the company £166.67, whereas if you had relevant life insurance, this would cost the company £80 only, giving a saving of £86.67, or 52%. This is assuming you are a higher rate tax payer with dividend income.

You will find many insurance companies that offer this relevant life insurance policy although it would be advisable to get some independent specialist financial advice too.

Please contact Southside Accountants Wimbledon for your tax and accountancy needs.

Written by Nisha Patel – Chartered Certified Accountant

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