Relevant Life Policy for Company Directors and Contractors
To stem the tide that's diminished benefit-in-kind for company directors, we welcome a new type of life cover. It brings death-in-service cover to smaller businesses and goes by the name of Relevant Life.
It’s available to all company directors, contractors and freelancers running their own limited business. Yet many for whom the creators designed the product are unaware such tax-efficient life cover exists.This guide hopes to outline the benefits from two perspectives:
- covering your nearest and dearest should the worst happen in an affordable and accessible manner;
- the tax-saving aspect of Relevant Life Cover, by paying premiums pre-tax through your company.
Permanent employees expect death-in-service cover as part of their package. More often than not, it’s tied to a contribution-matched pension scheme.
This type of cover pays out as much as 3-4 times an employee's annual salary if they die whilst under their contract of employment. They name their beneficiaries, what percentage goes to whom and that's it. The employer, or their trust, takes care of the rest.
There’s been little scope to date to implement a similar policy for limited company contractors. The main problem is that many are the sole employees of their company. Problem? Solved:
Relevant Life policies have changed the game
Some independent professionals are savvy enough to take out life insurance in person. But the problem with traditional policies is that you can only pay premiums from your net income, after tax.
Another issue is that any such cover is personal, so it covers the policy holder alone. But what if your partner helps you run the business? What about those small business owners who've grown and employ others? That personal cover looks, all of a sudden, worse than useless.
Relevant Life has turned this frown t'other way up. Death-in-service life cover is now affordable for limited company contractors and directors. It covers any employee who receives remuneration from the business, be it by way of salary or dividends.
Premiums are also classed as tax-deductible business expenses, validating them for corporation tax relief. That's because this new type of protection is set up in the name of the company, not the individual.
As such, the company pays the premium into a trust. It's then the trust that pays out the tax-free benefit upon death to a spouse, partner or any named beneficiary.
There are limits and criteria that must be met for Relevant Life insurance:
- the insured party can take out cover for up to 15 times their combined salary and dividend income;
- it’s a level term cover policy, meaning that it will pay out a set amount within a timeframe you choose;
- you must nominate the relevant life trust at the same time you put forward your application;
- the maximum term for the policy is 40 years and cannot extend beyond the age of 75;
- there’s no surrender value for the policy.
Is a relevant life policy suitable for me?
Relevant Life primarily serves the interests of two specific trading entities. However the benefits for limited company contractors are immediate; the two target entities are:
- high-earning employees with substantial pension pots;
- but who don’t want their death-in-service benefits to detract from their lifetime allowance;
- small business owners whose employee numbers don’t warrant a group life scheme;
- this second set includes company directors and limited company contractors.
This new type of policy has provided contractors new and old with a safety net they’ve not had since direct employment. For the first time, the depth of protection covering their families and dependents allows them to sleep easy.
Cover aside, there are many other reasons why Relevant Life will tempt contractors and directors:
- the benefit doesn’t detract from how much an employee can contribute to a pension scheme in their working lifetime;
- premiums don’t register towards an employee’s annual allowance. This enables an employee to contribute their full annual pension allowance in a separate scheme;
- premiums paid by employers don’t count as a benefit in kind, so the employee will not have to pay income tax on those payments;
- premiums don't count towards NICs (employer’s and employee’s);
- premiums, more often than not, are allowable expenses for end-of year tax calculations;
- a discretionary trust pays benefits-upon-death, thus are often exempt of inheritance tax.
Tackling tax for those unfamiliar with Relevant Life
Accountants may question the legitimacy of Relevant Life policies or query exactly how they work. They may fail to see how they can treat the premiums as an expense.
To help accountants understand, we’ve clarified the machinations of the policy. These explanations talk in their language, should you run into similar issues.
Benefit in Kind and Corporation Tax Relief
When the government simplified pensions, legislation removed life cover premiums from “charge to income”. In other words, they don't count towards taxable income.
Rather, it means that higher rate taxpayers can now reduce their tax liability. That's assuming that their company pays 20% Corporation Tax.
The Relevant Life policy benefits from the “wholly and exclusive” guidelines. For the layman, there’s a level of ambiguity concerning its statute. As such, we cannot earmark the premium as 100% definitive.
Insurers take the stance that the policy becomes “wholly and exclusively” a business transaction. That's on the proviso that you can prove the policy contributes to the employee’s payment package.
Relevant Life is also quite a new acquisition for the insurance market. There’s little guidance in existing HMRC manuals to add clarification for accountants, either.
As a result, the taxman views Relevant Life policies as registered schemes. The associated premiums they categorise as pension payments.
HMRC guidance for keyman/person cover only hints at what we can deduct. Their documentation deals with insurance deductions for employees and key personnel. It tackles the issue in a one-dimensial way, from the company perspective only.
But what that manual does do is point us in the right direction with “benefits paid direct to employees”. The guidance there documents much of HMRC’s guidance for pensions. Incorporated therein is a separate manual for company directors’ and shareholders’ contributions.
The result is that enlightened accountants to whom we speak claim relief on the basis that:
- it’s a legitimate part of the remuneration, the same as pension contributions;
- it’s unlikely HMRC would ever investigate to this minutia level to take you to task.
The Sum Assured
The final surmountable barrier is the sum assured and how it doesn’t attract tax. But this is more easily explained and in a language that both accountants and the layman will understand.
The trust nominated at the policy’s inception pays out benefits on Relevant Life policies. Said benefits go directly to the beneficiaries. As such, the company faces no tax liability.
The beneficiaries aren't liable for income tax either. That is unless the arrangement somehow breaches the legal requirements.
But you can't create the policy without nominating an appropriate trust. Thus, the legal boundaries must be upheld to even get the ball rolling.
A combination of many factors brings this cover home to roost. It offers a way for company directors and contractors to save on their tax bill during their lifetime.
Moreover, Relevant Life protects the small business owner's loved ones should the worst happen. So whatever the road may bring, plow on knowing you're covered for life!
John Yerou is a pioneer of contractor mortgages and owner and founder of Freelancer Financials, Contractor Mortgages®, C&F Mortgages and Self Employed Mortgages, trading styles and brands of the award-winning Mortgage Quest Ltd.