Relevant life plans frequently asked questions
In this article we look at some of the most comments questions and answers on relevant life plans.
- A relevant life plan is a death in service plan set up and paid for by an employer.
- Relevant life plans shouldn't be used for the benefit of the business.
- Relevant life plans were created under the 2006 pension simplification legislation that came in to force on 6 April 2006.
About relevant life plans
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’s allowed to have one?
Any employee or director of a limited company, 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 lifetime allowance as part of their pension benefits
- Employees looking to top up the benefits they get from their employer’s scheme.
Why are they tax efficient?
- The employee doesn’t pay income tax on the benefits.
- And 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 lifetime allowance for pensions. There’s a limit (currently £1,073,100) that can be built up over a lifetime in a pension ‘pot’ before a tax charge is due. Any lump sum under a registered scheme fall into this pot and any payments that come to more than this are taxed at 55%. So, a relevant life plan is a great way for high earners to opt out of a group scheme.
- The taxman 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 company’s accountant and the local inspector of taxes are happy that 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 expense1
- Premiums don’t count as part of the annual allowance for pension tax purposes.
1It’s difficult to be precise about this because different inspectors and accountants have different views. And there’s no HMRC precedent on this that we’re aware of.
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
|Premium||Ordinary life cover £1,000||Relevant life plan £1,000|
|Employee’s National Insurance contribution at 2%||£34||Nil|
|Income tax @ 40%||£690||Nil|
|Employer’s National Insurance contribution at 13.8%||£238||Nil|
|Total gross cost||£1,962||£1,000|
|Company net cost||Corporation tax relief at 19%||£373||£190*|
*Assumes that corporation tax relief is 19% and has been granted under the ‘wholly and exclusively’ rules. In both cases we’ve assumed a payment of £1,000 each year 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. We’ve also assumed that the employer is paying corporation tax at the small profits rate of 19% and will pay the employer’s National Insurance at 13.8%.
Why does the benefit not form part of the annual or lifetime allowance?
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 lifetime allowance. Nor does the premium have any effect on the annual allowance. Registered schemes will come under pensions legislation for the annual and lifetime allowance.
Why are the 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 the plan treated for inheritance tax?
The plan doesn’t belong to the employee so it doesn’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.
A charge like this could arise if the trust has any assets 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 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.
With a relevant life plan trust, the settlor will be the employer.
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.
When the trustees assign the plan to an employee who has left, does this create a tax charge?
We don’t believe so, providing the person covered 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 policy to the person covered – 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.
About anything else
Is there a replacement plan option?
No there isn’t. When an employee leaves service the trustees can appoint 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.
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 these 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 has to meet certain conditions:
- It can only provide life cover. 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 a trust. Plans are normally written through a discretionary trust to make sure they comply with this condition
- It mustn’t be set up to avoid tax. This is another good reason to use a trust for all cases.
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.