The Benefits of Relevant Life Policies
Relevant life policies whose premiums are paid by the company offer significant benefits for company owner-directors and their employees compared with personally-arranged cover paid for by the individuals themselves from their post-tax income. This real-life case study illustrates some of the practical advantages offered by relevant life policies and the potential tax savings. As usual we have changed all the names and the nature of their business to anonymize our clients. We’ve called the company E-Z-Aire Ltd (EZA).
EZA, a private limited company, designs and manufactures industrial air conditioning equipment. It has two 50% shareholding directors, Ben Richards and Alan Bell but much of the business’s success is dependent on the Head of Sales, Bruce Davies, a non-shareholder. The company would like to provide death in service benefits for the three individuals, but so far has been unable to arrange a group life scheme for less than five members.
Ben Richards, the Managing Director is 49 years of age and has substantial pension savings nearing the lifetime pensions allowance. He is a higher rate tax payer and has level term life assurance cover with a sum assured of £800,000, the premiums for which he pays from his own income. The cover is to provide for his wife and teenage daughter in the event of his death.
Bruce Davies, the Head of Sales is not a shareholder in the firm. He is 41 years of age, has a large mortgage on his home, which he shares with his partner, Sarah, and he too is a higher rate tax payer. He has made a Will leaving his house to Sarah and has a £675,000 death level term life assurance policy written in trust for her. That will suffice to repay the mortgage but will only leave a small surplus. Like Ben he pays the life policy premiums are paid from his post-tax income.
Alan Bell is the other Director. Aged 42 Alan is a serial entrepreneur, with little savings and a young family to support. The reason he has little savings is that he bankrolled Ben, an old friend, to set up the business, so its success is crucial to his own long-term financial well-being. For his to get his investment back plus a return on it EZA has to succeed. Alan is also a higher rate tax payer and has an own-life, death benefit, term plan with a sum assured of £800,000, again paid from his own income providing a combination of mortgage and family protection.
An alternative solution…
We advised Air Tech Limited to apply for relevant life policies to provide death in service benefits for its directors’ and employees’ families. The company applied for separate death benefit plans on the life of each individual. Each plan was written under a specially designed Relevant Life Policy trust from commencement, where benefits will be held for the family or dependents. The plans enable EZA to provide tax-efficient* death in service benefits on an individual basis, without the need for a group life scheme. The company pays the premiums.
The tax advantages
For Ben, the premiums do not count towards his annual pension allowance and the benefits if he dies will not form part of his lifetime pension allowance. For all three, any benefits will be paid through a flexible Relevant Life Policy trust for the benefit of their dependents, usually free of Inheritance Tax. The premiums are not be subject to Income Tax or employer’s/employee’s National Insurance contributions and are deductible for the company as a trading expense as the local inspector of taxes is satisfied that premiums are being incurred ‘wholly and exclusively’ for the purpose of trade.
|Insured Member||Ben Richards||Alan Bell||Bruce Davies|
|Self-Paid Cover||Cost to employer £262.62pm||Cost to employer £136.01pm||Cost to employer £105.28|
|Relevant Life Policy Amount and Cost||£800,000 sum assured over 20 yrs, non-smoker premium £167.31pm||£800,000 sum assured over 20 yrs, non- smoker Premium £86.65pm||£675,000 sum assured over 20 yrs, non-smoker Premium £67.07pm|
|Relevant Life Policy||Net Cost to employer £135.52||Cost to employer £70.19||Cost to employer £54.33|
|Saving offered £/%||£127.10 / 51.6%||£65.83 / 51.6%||£53.66 / 51.6%|
The self-paid cover cost is the cost to the employer of the additional salary and National Insurance Contributions the employer would have to pay each member to cover the cost of them providing themselves with cover. This is based on each individual paying Income Tax 40%, employer’s National Insurance 13.8%, employee’s National Insurance 2%. The net cost to the employer of the Relevant Life Policies is the premium less relief with the company paying 19% Corporation Tax. The local inspector of taxes has agreed that premiums are deductible as a trading expense. This information is based on our present understanding of current tax and HM Revenue & Customs practice. It may be affected by future changes and individual circumstances.