What is a relevant life policy and how does it differ from key person insurance?

Full answer

A relevant life policy (RLP) and key person insurance are both life insurance products arranged by a business, but they serve entirely different purposes and have different tax treatments. Relevant Life Policy (RLP): An RLP is a term assurance policy arranged by an employer that pays a lump sum on the death (or terminal illness) of an individual employee -- typically a director or senior employee -- to a discretionary trust set up by the employer for the benefit of the employee's family. Tax treatment: HMRC accepts that premiums on a properly structured RLP are a deductible business expense (not a P11D benefit for the employee) if three conditions are met: (1) the employer is the policyholder; (2) the sole beneficiary is a registered discretionary trust for the employee and their dependants; (3) the policy does not contain investment or savings elements. The benefit: paid to the trust (not the estate) and therefore outside both the employee's pension annual allowance and their estate for IHT purposes. Lump sum is received tax-free by the family. Benefits can be up to 25x remuneration in some insurer terms. Ideal for: company directors who want life cover without using their pension annual allowance (GBP 60,000 for 2026/27), or who want a larger death benefit than the pension pot provides. Also used by small businesses that cannot afford group life schemes. Key Person Insurance: Key person insurance is taken out by the company on the life (or incapacity) of an individual whose skills, relationships, or knowledge are critical to the company's revenue or profitability. The company pays premiums and receives the benefit -- it is a business protection asset. Tax treatment of premiums: HMRC's default position is that premiums on key person insurance are NOT tax-deductible (they are capital expenditure, protecting the company's capital). HOWEVER, if the following conditions are met, premiums may be deductible as a trading expense: the policy is a term policy with no investment element; the policy is to compensate the company for loss of profits (not capital/goodwill loss); the employee is not a shareholder or significant shareholder. Tax treatment of proceeds: if premiums were deductible, the policy payout is taxable income in the company's hands. If premiums were not deductible, the payout should be received tax-free as a capital receipt. Key differences summarised: - Who benefits: RLP = employee's family; key person = the business. - IHT: RLP benefit bypasses the estate entirely; key person payout stays in the company (and is in the owner's estate as company shares). - Pension allowance: RLP does not use the pension annual allowance; key person is unrelated to pensions. - Deductibility: RLP premiums are deductible as an employment cost; key person premiums may or may not be deductible depending on the policy purpose. Both types of policy should be reviewed by a specialist business protection adviser.

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