Can My Business Reclaim Tax for Life Insurance Premiums?

The straightforward answer to this question is ‘yes’. However, as you would expect when we talk about anything to do with Her Majesty’s Revenue and Customs (HMRC), it’s a little more complicated. There are conditions, exceptions and anomalies. Different types of life policy are treated differently so before you go away with an entirely positive attitude, let’s take a deeper dive into the complexities of insurance and tax deductibility in the context of business and identify the life insurance deductible premiums.

The Basic Position

If you run a business and you provide life and health insurance to some or all of your employees then, as long as the insurance falls into the category of ‘relevant life’ you should be able to claim the premiums as an allowable business expense to be set against profits for the purposes of tax. In this respect it is no different from other expenses like staff costs, overheads and legal costs. It’s worth bearing in mind, however, that if you take out your own personal cover, this won’t be tax deductible.

What is an Allowable Business Expense?

This is the phrase HMRC uses to describe any expenditure which it is authorised by law to accept as deductible. They are mostly costs that are essential to the routine running of the business and they’re broadly similar for businesses and for self employed health insurance. You can see more detail on the HMRC website [1]. It’s also worth looking at the current corporation tax rates and reliefs [2] as well as the general guidelines regarding gains on UK life policies [3].

They are only allowable if they have been incurred solely in the process of running the business. Anything that may have a personal rather than business aspect won’t be deductible. For example, the cost of travel on a business trip is generally deductible while the cost of commuting is not.

What Kinds of Insurance Qualify?

There are a number of insurances which you can arrange through your business of which the most common policies are ‘Death in Service’, Relevant Life’ and ‘Keyman or Keyperson Insurance’. We’ll look at each in turn.

Death in Service

This is a kind of group insurance. As such, it is an ideal way of providing a benefit to all the company’s employees under one scheme. As its name suggests, if an employee should die while in the service of the employer then the policy provides for a multiple of their annual salary to be paid to their beneficiaries. The death does not have to occur on company premises or in working hours, the policy applies in all circumstances for as long as the individual is employed. This means, of course, that when the employee leaves the company they are removed from the policy and the cover ceases.

Under UK tax legislation, death in service insurance is treated as a business expense. This means the company is not required to pay any corporation tax on the benefit and it can be deducted from taxable profit. Unlike some other benefits, such as company cars, the employee won’t have to pay tax on it either.

We can summarise its advantages as follows:

• Group cover for all employees
• Suitable for businesses of all sizes
• Cover ceases when the employee leaves
• A tax-efficient benefit
• An allowable business expense.

Relevant Life

If an employer wants to give blanket cover for all employees then death in service is the ideal choice, If, on the other hand, they want to provide insurance for a specific individual or individuals, then relevant life is the appropriate alternative.

For example, if you as the director of a limited company want to take out life cover for yourself through that company then this is the best way to do it. Just like death in service, in the event of the death of the insured person, their loved ones and named beneficiaries will receive a substantial pay-out. It may be also be a better option for very small companies who wish to give insurance to all their employees but are not big enough to benefit from the group savings of death in service.

Just like death in service, a relevant life policy is usually classed as an allowable business expense and therefore tax-deductible.

Its key features are:

• The insured is an employee or director of a UK company
• Particularly suitable for smaller business in place of death in service
• A tax-efficient benefit
• An allowable business expense.

Keyman or Keyperson Insurance

In one sense, this kind of policy falls squarely between the other two. It is designed to be used by employers to cover the lives of employees and colleagues who are deemed to be of prime importance to the continued prosperity of the company. It’s not universal cover but neither is it limited to a single individual.

Where it differs significantly is in the identity of the beneficiary. Where death in service and relevant life are designed to give financial help to loved ones and family after the death of an employee, Keyperson insurance benefits the company.

Keypersons could be the CEO or anyone whose contribution to the business is felt to be indispensable. Should they die then the company would expect to find itself seriously compromised until it can find a way to replace the highly valued service of the deceased. The company takes out the policy on its own account to give it that safety net. Not only does it help with future arrangements, but it can also provide partial compensation for loss of profits.

A very valuable feature of keyperson insurance is the option to include critical illness cover. If the insured should fall ill and be unable to work for a significant period, the policy will then pay out to cover for any financial losses which result from their incapacity.

In order to qualify as a tax-deductible business expense, a keyperson insurance policy must satisfy certain requirements. The most important of these is that the policy should be for the benefit of the business and not of any individual. For example, the business owner can’t claim the premiums as a tax-deductible expense if he or she is the named beneficiary.

There are other significant conditions. The purpose of taking out the policy is simply to cover potential lost trading income and cannot be used to cover capital loss or as security for a loan. The policy term cannot exceed the period in which the employee is essential to the company’s operations. There must be a sole relationship between the insured and the company which will benefit. The policy must be a pure term policy (for a defined period) without any investment element.

If it meets the criteria then the business will be entitled to claim corporation tax relief on the premiums. The pay-out to the company will be made free of tax although it may be that this money becomes taxable at a later date as part of the normal process of taxing business profit. It is a complex area and there may be measures that the company’s accountant could employ to minimise this later liability.

A summary of the key features:

• Cover for key personnel
• Pay-out is made to the business not an individual or relative
• Critical illness cover is an option
• Tax efficient
• Usually an allowable business expense

Relevant Life Insurance for Company Directors

In the past, owners or employees of a small business had only one option for their own life or health insurance, which was to take out a personal policy. The introduction of relevant life policies changed this.

It is now one of the advantages of being a company director that you can take out your own life policy through your company. This qualifies as relevant life. Doing it this way, instead of using your own personal funds can be a more cost-effective method. It is estimated that this can lead to savings of approximately 50%, which amounts to thousands of pounds over the life of the policy [4]. Since the premiums are paid by the company, it is likely that they will be looked on by HMRC as an allowable business expense. As a consequence, the company is entitled to claim corporation tax relief on those premiums and national insurance will not be payable either.

This kind of relevant life insurance for company directors is typically written in trust, which means it never forms part of your estate, unlike your savings and property. The important benefit is that the money paid out can go directly to your beneficiaries without grant of probate and without being subject to inheritance tax. One of the limitations of using a trust vehicle is that the beneficiaries must be family members or dependents. It is possible that a trust might be subject to periodic and exit charges but if any payment into the trust is paid out as soon as possible to the beneficiaries, then these charges could be avoided.

Tax on Proceeds from a Keyperson Insurance Claim

Although the premiums for qualifying policies are often tax allowable, it’s important to remember that this isn’t the whole story.

Even if HMRC does grant tax relief on the premiums it will usually treat any proceeds paid out under the policy as taxable income, identifying it as a trading receipt.

However, if your premiums are not deemed to be tax-deductible so that you are in effect paying them out of taxed income, then HMRC is unlikely to tax it as a trading receipt although it may still put it into another taxation class.

If the premiums are deductible but the company chooses not to claim the relief to which it is entitled, the proceeds will still qualify as a taxable trading receipt.

A Note on Using Business Life Insurance for Loan Protection

As we’ve already mentioned this is not considered to be a purpose which qualifies a policy for tax-deductible status. It is entirely appropriate to use an insurance policy as security or to repay a loan but they are not judged to be business expenses. Instead they are treated as being for a capital purpose.

Conversely, the proceeds of a policy set up for this purpose are not taxable because they are not deemed to be a trading receipt. Instead they are treated as a capital receipt.

Final Thoughts

As you can see, this is not a straightforward area. It takes a certain amount of careful navigation in order to obtain the maximum benefits with the minimum of loss. However, there are many very sound reasons for exploring the potential of life policies, as an employee benefit and as a protection for your business. If you can make arrangements that also satisfy HMRC, you could reap considerable rewards. It’s not something to pursue without expert advice, but it demands serious consideration.

References

• [1]www.gov.uk
• [2]www.gov.uk
• [3]www.gov.uk
• [4]actuarialpost.co.uk