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.
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?
*It’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.
|Premium||Ordinary life cover £1,000||Relevant life plan £1,000|
|Company gross cost||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 the contracted-in rate of 13.8%.
Relevant life plans are non-registered arrangements. They replace the old unapproved schemes. Before 6 April 2016 and the legislation to simplify pensions, these schemes were taxed as income in the hands of the employee under ITEPA 2003 (Part 6 Ch 1). S.247 of the 2004 Finance Act removed this charge so there is no longer any income tax or National Insurance implications on the employee.
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.
HMRC has clarified this since 6 April 2016. To qualify under the ‘wholly and exclusively’ rules, the premiums should be treated as part of the employee’s remuneration. A person’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 manuals. Reference BIM 45530 deals with life policies on employees. BIM 46000 onwards covers benefits paid direct to employees – BIM 46035 deals with directors in particular.
This could mean that 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 the taxman.
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, from our many discussions with accountants and tax specialists, we don’t believe the relatively modest cost of relevant life plans will cause HMRC any concern for a full-time working director who would just claim under the self-assessment process.
The employer doesn’t need to make a separate entry on their self-assessment form – they should just include the premiums as part of their overall remuneration package.
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.
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.
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 under s.210 TCGA because the employee who has left isn’t paying for the assignment.
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.
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:
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.