Relevant life plans explained

What are relevant life plans?

They’re single life, stand-alone death-in-service plans.

Relevant life plans are covered by the same legislation that deals with group schemes. But unlike the schemes provided by most big employers, they’re ‘non-registered’, so don’t fall under pensions legislation.

They provide life cover, through a discretionary trust, for the benefit of employees’ and directors’ dependants. They’re taken out and paid for by the employer.

Who can have a relevant life plan?

Any employee or director of a limited company, partnership, limited liability partnership, charity or a sole trader can have one. However, you should check with the provider as some do not cover sole traders or equity partners where they are taxed under Schedule D. 

Who are they for?

• Small companies that don’t have enough individuals for a group scheme.
• High earners who don’t want their group death-in-service lump sum benefits tested against their lump sum and death benefit allowance as part of their pension benefits.
• Employees looking to top up the benefits they get from their employer’s scheme.

Why are relevant life plans tax efficient?

The benefits

• The employee doesn’t pay income tax on the benefits.
• They’re not usually subject to inheritance tax. In exceptional cases there could be a periodic tax charge on the trust – for full details see the ‘about tax’ section below.
• Unlike lump sums paid under a registered pension scheme, relevant life plan benefits don’t form part of an employee’s lump sum and death benefit allowance for pensions. So, a relevant life plan is a great way for high earners to opt out of a group scheme.

The premiums

• HMRC doesn’t treat premiums paid by the employer as a P11D benefit. For a higher rate taxpayer in a small company this can reduce costs by up to a third.
• Neither employee nor employer has to pay National Insurance on the premiums.
• So long as the premiums are ‘wholly and exclusively for the purpose of trade’ as part of the employee’s remuneration, they can be treated as a trading expense. Though this could be challenged by HMRC.
• Premiums don’t count as part of the annual allowance for pension tax purposes.

The table below shows the effect on the company of paying for ordinary life cover and having it treated as a benefit in kind. It then looks at a relevant life plan assuming it qualifies for tax relief. 

How a relevant life policy can cut company costs

*Assumes that corporation tax relief is 19% (small profits rate) and is allowed under the ‘wholly and exclusively’ rules. In both cases we’ve assumed a payment of £1,000 each month for the life cover on an employee who’s paying income tax at 40% and employee’s National Insurance at 2% on the top end income. 

Our Relevant life calculator can also be used. 

Why does the premium not create a P11D charge?

Relevant life plans are non-registered arrangements. They replaced the old unapproved schemes. 

Do the benefits of a relevant life plan form part of the annual or lump sum and death benefit allowance?

No. Because relevant life plans are non-registered schemes, they don’t come under pension legislation. This means there’s no connection between the sum assured on claim and the lump sum and death benefit allowance. Nor does the premium have any effect on the annual allowance. 

How is tax relief given on relevant life plan premiums?

Premiums paid by the employer will generally be treated as a business expense for tax purposes provided they are being paid “wholly and exclusively for the purpose of the business.

To qualify under the ‘wholly and exclusively’ rules, the premiums should be treated as part of the employee’s remuneration. An individual’s remuneration package doesn’t represent just cash, but other benefits like death-in-service (group or single relevant life plans) and pensions.

The cost of the employee’s package should be reasonable in light of his or her contribution to the business and compared to similar businesses.

This is the same guidance you’ll find in the HMRC’s business income reference manuals: 

• Business Income Manual - BIM 45530 deals with life policies on employees
• Business Income Manual - BIM46000 onwards covers benefits paid direct to employees 
• Business Income Manual BIM46035 deals with directors in particular.

This could mean a spouse who works part-time might not get relief on a big relevant life plan or pension contribution as it’s not appropriate to the work he or she does. However, the same benefits for a full-time working director should be perfectly acceptable to HMRC.

This is why we can’t say for sure that every case will be an allowable business expense. Each case is different and depends on the employee’s circumstances. However, it is our understanding that this would be allowable in the vast majority of circumstances.

Why are relevant life plan benefits not subject to corporation tax?

Because the company doesn’t own the plan. Although the company is the proposer, if the plan is set up under trust from the start it’s not a company asset. It’s owned by the trustees for the benefit of the potential beneficiaries and any proceeds are paid directly to them. This is one of the reasons relevant life plans must be set up in trust from the outset.

How is a relevant life plan treated for inheritance tax?

If the plan is held in a discretionary trust, it doesn’t belong to the employee, so it won’t form part of their estate for inheritance tax purposes.

But, like all non-pension discretionary trusts, the trust itself can be subject to periodic and exit charges.

Periodic charges

A periodic charge may arise on a 10-year anniversary of the date the trust was set up. If this is the case, there will be a charge of up to 6% on the value of the assets in excess of the trust’s available nil rate band.

However, we believe it’s unlikely that such a charge will arise in the vast majority of cases. The most likely cause would be if the employee died just before a 10th anniversary and there wasn’t enough time to pay the assets out to the beneficiaries.

Exit charges

If the assets stay in the trust past a 10-year anniversary, there could be an exit charge when they’re paid out. This would 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 3 months of a 10-year anniversary.

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. 

When the trustees assign a relevant life plan to an employee who has left, does this create a tax charge?

We don’t believe so, providing the person covered (the employee) is still in good health. The company doesn’t own the plan so there’s no benefit in kind. The trustees are just exercising their discretionary powers to assign an asset to a beneficiary, in this case the plan to the employee.

Nor do we believe there will be any capital gains tax charge on claim because the employee who has left isn’t paying for the assignment.

Is there a replacement plan option?

No there isn’t. When an employee leaves service, the trustees can assign the plan to the employee who can continue it as a personal plan. They could even put it into a personal trust if they wanted to.

If the plan’s going to be assigned to the employee when they leave the company, there are two steps to take. First, the trustees would need to make an irrevocable absolute appointment in favour of the employee. Second, the trustees would need to assign the plan to the employee. This can be achieved within the one deed.

If the employee goes to another company, or starts up a new one, the new company can take over the plan and pick up the premiums.

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

Can relevant life plans be used for business protection?

No. The legislation states that the primary or main purpose of a relevant life plan must not be for tax avoidance. We’d be concerned that if the benefits were paid to non-dependant or non-family beneficiaries (such as co-shareholders) to avoid the benefit in kind charge, or to get tax relief, this rule could be compromised. It would be OK if the co-shareholder were also a spouse, or one of the defined beneficiaries in the trust. The legislation also states that benefits can’t be paid to a limited company, so using a relevant life plan for key person purposes wouldn’t be allowed.

To qualify as a relevant life plan, a plan must meet certain conditions:

• It can only provide life cover or terminal illness benefit. No disability or critical illness benefits are allowed.
• The term can’t go beyond the employee’s 75th birthday.
• There can’t be a surrender value.
• Benefits must be paid to an individual or charity, or to the trustees of a trust. This is why all relevant life plans need to be written in trust from outset.
• It mustn’t be set up to avoid tax.

A relevant life plan is defined in subsection 393B(4) of the Income Tax (Earnings and Pensions) Act 2003 (‘ITEPA’) as:

• (a) an excepted group life policy as defined in section 480 of the Income Tax (Trading and Other Income) Act 2005,
• (b) a policy of life insurance, the terms of which provide for the payment of benefits on the death of a single individual, and with respect to which:
  • (i) condition A in section 481 of that Act would be met if paragraph (a) in that condition referred to the death, in any circumstances or except in specified circumstances, of that individual (rather than the death in any circumstances of each of the individuals insured under the policy) and if the condition did not include paragraph (b), and
  • (ii) conditions C and D in that section and conditions A and C in section 482 of that Act are met, or

(c) a policy of life insurance that would be within paragraph (a) or (b) but for the fact that it provides for a benefit which is an excluded benefit under or by virtue of paragraph (a), (b) or (d) of subsection(3) of ITEPA s.393B.

So the conditions that need to be met if a plan is to be a relevant plan within the ‘single life’ category set out in (b) are:

• Condition A in section 481 of the Income Tax (Trading and Other Income) Act 2005 (‘ITTOIA’) – that “under the terms of the policy a sum or other benefit of a capital nature is payable or arises—
  • (a) on the death in any circumstances of each of the individuals insured under the policy who dies under an age specified in the policy that does not exceed 75, or
  • (b)on the death, except in the same specified circumstances, of each of those individuals who dies under such an age."
• Condition C in section 481 – that “the policy does not have, and is not capable of having, on any day: a surrender value that exceeds the proportion of the amount of premiums paid which, on a time apportionment, is referable to the unexpired paid-up period beginning with the day, or
  if there is no such period, any surrender value.”
  
  
• Condition D in section 481 – that “no sums or other benefits may be paid or conferred under the policy, except as mentioned in condition A or C.” 
  
  
• Condition A in section 482 of ITTOIA – that “any sums payable or other benefits arising under the policy must (whether directly or indirectly) be paid to or for, or conferred on, or applied at the direction of:
  • an individual or charity beneficially entitled to them, or
  • a trustee or other person acting in a fiduciary capacity who will secure that the sums or other benefits are paid to or for or conferred on, or applied in favour of, an individual or charity beneficially.”
    
    
• Condition C in section 482 – that “a tax avoidance purpose is not the main purpose, or one of the main purposes,
  for which a person is at any time:
  • the holder, or one of the holders, of the policy, or
  • the person, or one of the persons, beneficially entitled under the policy.”