Business protection – Loan protection
If you’re advising corporate clients on business protection, you’ll find this article particularly helpful. We look at the technical aspects of loan protection.
- Will not meet the 'wholly and exclusively' test.
- No tax relief on premiums.
- The plan is taken out on own life and placed in trust.
Where a plan is taken out to repay a business loan in the event of the death or critical illness of a partner, member or sole trader, the tax treatment of the premiums and the proceeds are more straightforward than with key person protection plans.
Since the plan will have been taken out to protect the capital of the business, it wouldn’t meet the ‘wholly and exclusively’ test under section 34 ITTOIA 2005, which means it’s unlikely that tax relief will be given on premiums.
Where the cover is designed to repay a partnership loan, usually the partners concerned take out own Life Cover and place it under a business trust for the other business partners. In the event of a claim, they would receive benefits from the trust and then pay their share of the money into the business to pay off the debt. If the partnership is in Scotland or is a limited liability partnership, the partnership itself can be the owner of the plan if the loan is in the name of the business.
In the case of a sole trader, loan protection would be taken out on their own life and placed into trust for their family to pay off the outstanding loan on death.
No tax relief would be due on paying the premiums through the business, since the plan is specifically for loan protection purposes (HMRC tax bulletin February 1992).
The information provided is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice. Also it may not reflect the options available under a specific product which may not be as wide as legislations and regulations allow.
All references to taxation are based on our understanding of current taxation law and practice and may be affected by future changes in legislation and the individual circumstances of the investor.