Advantages of a relevant life plan

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

• The benefit won’t count towards an employee’s pension Lump Sum Allowance or Lump Sum Allowance Death Benefit 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.