Relevant Life - frequently asked questions

Your questions answered

Royal London Relevant Life Plans are single life, stand-alone death-in-service plans.

They are governed by the same legislation that deals with group schemes. However unlike most large employer provided schemes they are 'non–registered', so do not fall under pensions legislation.

Relevant life plans provide life cover for the benefit of employees' and directors' dependants paid through a discretionary trust. They are taken out and paid for by the employer.

Any employee of a business, including directors. The business can be a limited company, a partnership, a charity or a sole trader.

However we cannot cover sole traders or equity partners themselves where they are taxed under schedule D.

'Salaried' partners who are taxed as schedule E can be covered.

  • Small companies who have too few members for a group scheme.
  • High earners who do not want their group death-in-service lump sum benefits to be amalgamated with their lifetime pension allowance.
  • Employees who are looking to top up the benefits they receive from their employer's scheme.

Benefits

  • Benefits are payable free of income tax.
  • Benefits are normally paid free of inheritance tax. In exceptional circumstances there could be a periodic tax charge on the trust. For full details on this see the 'Trust' section below.
  • Unlike lump sums paid under a registered scheme, Relevant life plan benefits do not form part of the employee's lifetime allowance for pensions. There is a limit (£1 million for tax year 2016/2017) that you can accumulate over a lifetime in your pension 'pot'. Any lump sum payments (as opposed to dependant's pension) under a registered scheme fall into this pot and any payments to the estate in excess of this is taxed at 55%, so a Relevant Life Plan is a useful vehicle for high earners to opt out of a group scheme.

Premiums

  • Premiums paid by the employer are not treated as a P11D benefit and are not taxed back on the employee. For a higher rate taxpayer in a small company this can reduce costs by up to a third.
  • There are no National Insurance implications on either the employee or the employer.
  • Subject to the company's accountant/local tax inspector accepting that the premiums are 'wholly and exclusively for the purpose of trade' as part of the remuneration of the employee, then they may be relievable as a trading expense. This is a bit of a difficult area to be precise on as different inspectors and accountants will have different views. Being a relatively new concept there is no HMRC precedent on this that we are aware of.
  • Premiums do not count as part of the annual pension allowance for tax purposes.

This diagram shows the effect on the company of paying for an ordinary life policy and having it treated as a benefit in kind. It then looks at a Relevant Life Plan assuming tax relief is available.

  Ordinary life policyRelevant life policy
Payment   £1,000 £1,000
Company gross cost Employees National Insurance contribution @ 2% £34 -
  Income tax @ 40% £690 -
  Employer's National Insurance contributions @ 12.8% £238 -
  Total gross cost £1,962 £1,000
Company net cost  Corporation tax relief at 20%  £392 £200*
  Net cost £1,570 £800*
*Assumes that corporation tax relief at 20% has been granted under the 'wholly and exclusive' rules.
In both cases we have assumed a payment of £1,000 each year for the life cover on an employee who is paying income tax at 40% and employee's National Insurance at 2% on the top end of income. We have also assumed that the employer is paying corporation tax at the small companies' rate of 20% and will pay employer's National Insurance at the contracted in rate of 12.8%.

Why does the premium not create a P11D charge?

Relevant Life Plans are non-registered arrangements and are the successor to the old unapproved schemes. Prior to A day and the pensions simplification legislation, these schemes were taxed as income in the hands of the employee under ITEPA 2003 (Part 6 Ch 1). This charge to income tax was removed by s.247 of the 2004 finance act and consequently there is no longer any income tax or national insurance implications on the employee.

How is tax relief granted on the premium?

The tax relief question is a matter of standard HMRC practice, which has been clarified post A day. To qualify under the "wholly and exclusively" rules the premiums should be viewed as being part of the remuneration of the employee. The remuneration package does not represent just cash, but other benefits such as death in service (group or single Relevant Life Plans) and pensions.

The key is that the cost of the package should be reasonable in relation to that employee in light of his contribution to the business and with reference to other similar businesses. These are the same guidance rules issued by HMRC in relation to pension contributions post A day - now found in the Business Income Manuals. Reference BIM 45530 which deals with life policies on employees. It directs readers to BIM 46000 onwards in relation to "benefits paid direct to employee" - in particular BIM 46035 which deals with Directors. 

This could mean that a part-time spouse who works a few hours might not get relief on a large Relevant Life Plan or pension contribution as it is not appropriate to the work he or she does. However the same benefits for a full-time working director should be perfectly acceptable.

The reason we cannot say definitively that every case will be an allowable business expense is because of this. Each case ultimately will depend on the facts of that employee. However in all our discussions with accountants and our tax specialists, it is not considered that the relatively modest cost of Relevant Life Plans will cause any concern to HMRC for a full time working director and would just be claimed under the self-assessment process.

It is our understanding that no separate entry is made in respect of the Relevant Life Plan premiums. It will just be incorporated as part of the overall remuneration package.

Have you had HMRC clearance on these plans?

We have not sought advance clearance as HMRC have indicated they will not give such generic clearance. They will just look at each situation on a case-by-case basis should the need arise. However we believe in most cases the accountant can justifiably claim relief under the self-assessment process without reference to the local inspector.

Why does the benefit not form part of the annual or lifetime allowance?

Because Relevant Life Plans are non-registered schemes they do not come under pension legislation, therefore there is no connection between the sum assured on claim and the lifetime allowance, nor does the premium have any effect on the annual allowance.

Registered schemes are registered with HMRC and will come under pensions legislation in both these respects.

Why are the benefits not subject to corporation tax?

Because the policy is not owned by the company. Although the company is the proposer, the policy is issued under trust from outset and is therefore not an asset of the company. It is owned by the trustees for the benefit of the potential beneficiaries and paid directly to them. This is one of the reasons why we insist on the policy being issued under trust from outset.

Is there any income tax payable by the beneficiaries?

No. As long as the plan adheres to the conditions laid down in the technical brochure then there is no income tax charge.

How is the policy treated for inheritance tax?

The policy does not belong to the life assured and therefore does not form part of the estate for IHT purposes.

However, in common with all non-pension discretionary trusts, the trust itself can be subject to periodic and exit charges. Such a charge could arise if the trust has any assets on a 10-year anniversary. If this is the case then a periodic charge will arise on the value of those assets in excess of the current nil rate band at a rate of up to 6%. With a Relevant Life Plan trust the settlor will be the employer.

However it is considered unlikely that such a charge will arise in the vast majority of cases. The most likely cause will be if death occurs just before a 10th anniversary and there is not enough time to pay the assets out to the beneficiaries.

If the assets remain in the trust past a 10-year anniversary then there could be a potential exit charge when paid out. This will be a proportion of the last periodic charge due, again up to a maximum of 6%.

However, where assets are paid out as soon as possible following a claim, there's unlikely to be any significant exit charge. And there won't be any exit charge if the assets are paid out within three months of a 10-year anniversary.

If death occurs at any other time then no periodic charge will arise.

Can the trust be used with a spousal bypass will trust?

Yes. The bypass trust will need to be entered into the trust as a potential beneficiary and we would recommend that the nomination form is completed accordingly to assist the trustees in their decision.

When the trustees assign the policy back to an ex-employee, does this create a tax charge?

We don't believe so, providing the person covered is still in good health. The policy is not owned by the company and therefore it cannot be treated as a benefit in kind. It is merely the trustees exercising their discretionary powers to assign an asset of the trust to any beneficiary, in this case the policy to the life assured.

Neither do we believe that any capital gains tax charge will arise on claim under s.210 TCGA as the assignment to the ex-employee is not for consideration.

Can these plans be used for business protection?

No. The legislation requires that the primary or main purpose of the policies must not be for tax avoidance. We would be concerned that if the benefits were paid to non-dependant or non-family beneficiaries (such as the co-shareholders) to avoid the benefit in kind charge, or to obtain tax relief on such policies, then this could compromise this rule. If the co-shareholder were also a spouse, or one of the defined beneficiaries in the trust then this would be acceptable.

It is also a requirement in the legislation that benefits cannot be paid to a limited company, so using this for key person purposes would also be disallowed.

Yes. To qualify for Relevant Life Plan status there are certain requirements the plan has to meet.

  • It must provide only life cover. No disability or critical illness benefits are allowed.
  • The term cannot exceed the 75th birthday of the employee.
  • No surrender value is allowed – Royal London policies don't have surrender values.
  • Benefits must be payable to an individual or charity, or to a trust. We insist on the plan being written through a discretionary trust to ensure we comply with this requirement.
  • It must not be set up for tax avoidance purposes. To avoid this happening we insist on using a trust for all cases.

We will allow level, decreasing or increasing cover. We will also allow renewable term assurance.

Yes. Cover can be increased each year without evidence of health using the RPI increase option within the 2-10% interest rate range.

Alternatively fixed increases can be used up to 5% each year. Other increases are allowed at any time but will require health evidence.

Since 'A' day the statutory limits on the amount of cover that can be provided have been removed. However we do have a maximum we are prepared to cover which has been agreed with our re-assurers.

We offer relevant life cover for:
up to 30 times annual total remuneration for clients aged under 40 years
up to 25 times annual total remuneration for clients aged 40 to 49 years
up to 20 times annual total remuneration for clients aged 50 to 59 years
up to 15 times annual total remuneration for clients aged 60 years and over.

We’ll need proof of earnings for cover of more than £3.5 million, but not for amounts below that. In more unusual cases we may need further information to establish earnings but we don't need a financial questionnaire to be completed.

A relevant life policy can only include life cover but you can have multiple life covers with different terms within the plan as long as they are all for the purpose of providing benefits for dependants.

You cannot use the same plan for other key person or ownership protection benefits.

We use a discretionary trust with the potential beneficiaries being family members, although there is the ability to include non-family members such as a live in partner.

The employer is automatically a trustee but we do require at least one additional trustee. This can be anyone but we normally recommend that the additional trustee is an officer of the company (director/company secretary) to reinforce the commercial aspect of the arrangement.

The life assured can be a trustee, but if this is the case there must be an additional trustee unless corporate body is a trustee.

For single person companies with no company secretary this will have to be an external person. It could be a spouse or the company's accountant or solicitor. On death the trustee duties of the company will have to fall onto the executors or administrators of the estate who will either carry out those duties or appoint someone else.

In all cases we recommend that a nomination form is completed to direct the trustees as to whom they pay benefits to. This is not binding on them but in most cases will guide them and speed payments up.

Trust taxation

In exceptional circumstances a periodic charge could be levied on any assets in the trust on any of the 10-year anniversaries. For this to happen death would have to take place very close to this anniversary leaving the trustees no time to pay the benefits out. The charge would be a maximum of 6% of the assets in the trust in excess of the nil rate band.

If the 10-year charge applies then there could also be an exit charge when assets are paid out. In theory this could also be up to 6% if the assets remain in the trust for the next 9-plus years, however assuming benefits are paid out just after the anniversary the charge will be insignificant.

It is unlikely that these charges will apply in the vast majority of cases.

Yes. In the beneficiary box put the bypass trust in as a potential beneficiary and nominate that trust under the nomination form.

No there isn't, however we don't need one. When an employee leaves service the trustees can appoint the policy back to the employee and they can then continue it as a personal policy. They could even put it into a personal trust if they chose to.

If the policy is going to be assigned to the life assured on leaving service there is a 2-step process. First of all the trustees would need to make an irrevocable absolute appointment in favour of the life assured. The trustees would then need to assign the policy to the life assured. Please ask us for a copy of the deed we have available for this purpose.

Alternatively if the employee goes to another employer, or starts a new company up, the new company can take over the policy and pick up the premiums. In these circumstances we would recommend that the trustees are changed to the new employer.

These options may often be better than those offered under a group scheme. Some schemes don't offer a replacement policy while those that do can be expensive.

You can quote through IRESS Exchange, iPipeline and Webline. Or log in to quote and apply and quote in the relevant life section.

Business can be submitted online through our quote and apply section, or on paper to the usual address. Remember to submit your application with the Relevant Life Plan trust form. If you're applying online, you have to tick the box to say whether you have completed the form. If the form hasn't been completed you won't be able to enter a start date, but you can still submit the application.

Send paper applications to our normal address:

Royal London
St. Andrew House
1 Thistle Street
Edinburgh
EH2 1DG 

Last updated: 03 Oct 2016

This website is intended for financial advisers only and shouldn't be relied upon by any other person. If you are not an adviser please visit royallondon.com.

The Royal London Mutual Insurance Society Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The firm is on the Financial Services Register, registration number 117672. It provides life assurance and pensions. Registered in England and Wales number 99064. Registered office: 55 Gracechurch Street, London, EC3V 0RL.