What are the tax advantages of a relevant life policy?

Full answer

A relevant life policy (RLP) is a term life-insurance plan an employer takes out and pays for on the life of an individual employee or director, with benefits paid into a discretionary trust for the family. It is designed to give small companies and their directors the kind of death-in-service cover larger group schemes offer, but on a single-life basis. The tax treatment is the main attraction. Unlike most employer-paid insurance, the premiums are normally not treated as a benefit in kind, so the employee pays no Income Tax and no National Insurance on them, and the employer pays no Class 1A NI either. The premiums are also usually allowable as a business expense, so the company can typically deduct them against Corporation Tax, provided they meet the 'wholly and exclusively' for-business test. Compare this with a personal life policy paid from taxed income: for a higher-rate taxpayer and director, routing cover through an RLP can be markedly cheaper once Income Tax, NI and Corporation Tax relief are all taken into account. Because the policy is written into trust from the outset, the lump sum is paid to beneficiaries via the trustees rather than into the deceased's estate. This means it normally sits outside the estate for Inheritance Tax (which charges 40% above the available nil-rate bands), and it usually pays out quickly without waiting for probate. RLPs suit company directors and key employees, especially in small firms without a group scheme. There are conditions: cover is term assurance only (no investment or surrender value), it must end by a set age, and it cannot include critical-illness benefit. The exact saving depends on premiums, your tax rates and Corporation Tax position -- model the Corporation Tax and Income Tax angles before deciding, and take advice on the trust set-up.

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