Advantages of a relevant life plan

There are lots of good reasons to choose a relevant life plan. But it all boils down to tax-efficient life cover for directors and employees, and what business doesn’t want that?
Key facts
  • The benefit won’t form part of an employee’s lifetime allowance and the premiums don't count towards their annual allowance. 
  • The benefits are paid through a discretionary trust. 
  • If certain conditions are met it can be a qualifying relevant life plan.  

Here are the reasons why a relevant life plan might be suitable:

  • The benefit won’t form part of an employee’s pension lifetime allowance.
  • The premiums won’t form part of their annual allowance. So an employee can still make full use of their annual allowance to contribute to a registered pension scheme.
  • The taxman doesn’t treat premiums paid by employers as a benefit in kind. This means employees don’t have to pay income tax on the premiums.
  • Nor are the premiums usually assessable for employer or employee National Insurance contributions.
  • If the taxman is satisfied the premiums qualify under the ‘wholly and exclusively’ rules, the employer can treat them as an allowable expense for corporation tax.

The benefits are paid through a discretionary trust. They’re paid free of inheritance tax because the pay-out isn’t part of the employee’s estate. But the trust will be subject to normal inheritance tax rules for discretionary trusts. Sometimes this may result in the following charges:

  • Up to 6% of the value of the trust fund on each 10th anniversary of the date the trust was set up (the periodic charge). There will only be a periodic charge if there’s a value held in the trust at the 10th anniversary. This could happen if, for example, the employee died shortly before the 10th anniversary and the benefits hadn’t been distributed to the beneficiaries.
  • Up to 6% of the value of the trust fund when it pays out to a beneficiary (the exit charge).

Under current legislation it’s possible to avoid these charges by splitting the cover into several smaller plans each written under trust on different days.

By doing this each trust will have its own nil rate band. As long as each plan has an amount of cover which is less than this no charges should arise.

Qualifying rules for a relevant life plan

There are a few conditions a plan has to meet to qualify as a relevant life plan. If it meets these conditions, it’s eligible for the tax benefits.

A single person relevant life plan has to meet certain conditions:

  • It can only provide life cover and no other benefit.
  • It can only pay out a lump sum when the employee dies in service before the age of 75.
  • It can’t have a surrender value. A small surrender value is allowed in some circumstances.
  • It can only pay out to an individual or a charity.
  • It shouldn’t be used to avoid tax.

You can do this through a trust. To maximise the tax efficiency of the plan, you should set it up under a discretionary trust from the start.

Note

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.

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Last updated: 24 Jun 2019

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.