What is a relevant life plan?
Relevant life plans are a way of providing death-in-service benefits on an individual basis no matter how large or small your business is.
What are the benefits?
- The payments may be treated as an allowable expense for the company in calculating its tax liability, as long as the local inspector of taxes is satisfied they qualify under the ‘wholly and exclusively’ rules.
- Although the company makes the payments, they are not treated as a benefit in kind, so they are not included in your income tax assessments. For a higher rate taxpayer, this could be a significant saving.
- Available for spouse’s cover, if they receive income from the business, salary, dividend or both.
- Death benefits, if payable, will be free of all tax, including Inheritance Tax. They will also avoid Probate, ensuring payouts are made quickly without penalties or fees.
- Unlike a registered group scheme, the benefit won’t form part of your annual or lifetime pension allowance
Who would benefit from a relevant life plan?
- Small businesses that don’t have enough eligible employees to warrant a group life scheme.
- Contractors that have incorporated their own limited companies.
- High-earning employees or directors who have substantial pension funds and don’t want their benefits to form part of their lifetime allowance.
- Employees of any type of business, quite often one’s spouse.
- Members of group life schemes who want to top up their benefits.
How a relevant life policy can cut company costs
|Premium||Ordinary life cover
|Relevant life plan
|Company gross cost||Employee’s National Insurance contribution at 2%||£34||Nil|
|Income tax @ 40%||£690||Nil|
|Employer’s National Insurance contribution at 13.8%||£238||Nil|
|Total gross cost||£1,962||£1,000|
|Company net cost||Corporation tax relief at 20%||£392||£200*|
*Assumes that corporation tax relief is 20% and has been granted under the ‘wholly and exclusively’ rules. In both cases we’ve assumed a payment of £1,000 each year for the life cover on an employee who’s paying income tax at 40% and employee’s National Insurance at 2% on the top end income. We’ve also assumed that the employer is paying corporation tax at the small profits rate of 20% and will pay the employer’s National Insurance at the contracted-in rate of 13.8%.
The Legislation for Relevant Life Plans
Relevant life plans were created under the 2006 pension simplification legislation. Commonly known as ‘A-day’. We’ve detailed below the legislation that governs relevant life plans.
A relevant life plan is defined in subsection 393B(4) of the Income Tax (Earnings and Pensions) Act 2003 (‘ITEPA’) as:
(a) an excepted group life policy as defined in section 480 of the Income Tax (Trading and Other Income) Act 2005,
(b) a policy of life insurance, the terms of which provide for the payment of benefits on the death of a single individual, and with respect to which: (i) condition A in section 481 of that Act would be met if paragraph (a) in that condition referred to the death, in any circumstances or except in specified circumstances, of that individual (rather than the death in any circumstances of each of the individuals insured under the policy) and if the condition did not include paragraph (b), and (ii) conditions C and D in that section and conditions A and C in section 482 of that Act are met, or
(c) a policy of life insurance that would be within paragraph (a) or (b) but for the fact that it provides for a benefit which is an excluded benefit under or by virtue of paragraph (a), (b) or (d) of subsection(3) of ITEPA s.393B.
So the conditions that need to be met if a plan is to be a relevant plan within the ‘single life’ category set out in (b) are:
Condition A in section 481 of the Income Tax (Trading and Other Income) Act 2005 (‘ITTOIA’) – that “under the terms of the policy a sum or other benefit of a capital nature is payable or arises on the death in any circumstances of [the individual] insured under the policy who dies under an age specified in the policy that does not exceed 75.”
Condition C in section 481 – that “the policy does not have, and is not capable of having, on any day:
(a) a surrender value that exceeds the proportion of the amount of premiums paid which, on a time apportionment, is referable to the unexpired paid-up period beginning with the day, or
(b) if there is no such period, any surrender value.”
Condition D in section 481 – that “no sums or other benefits may be paid or conferred under the policy, except as mentioned in condition A or C.”
Condition A in section 482 of ITTOIA – that “any sums payable or other benefits arising under the policy must (whether directly or indirectly) be paid to or for, or conferred on, or applied at the direction of:
(a) an individual or charity beneficially entitled to them, or
(b) a trustee or other person acting in a fiduciary capacity who will secure that the sums or other benefits are paid to or for or conferred on, or applied in favour of, an individual or charity beneficially.”
Condition C in section 482 – that “a tax avoidance purpose is not the main purpose, or one of the main purposes, for which a person is at any time:
(a) the holder, or one of the holders, of the policy, or
(b) the person, or one of the persons, beneficially entitled under the policy.”