The Ultimate Guide to Relevant Life Policies

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Over the years I have helped hundreds of company directors take advantage of these highly tax efficient relevant life policy schemes. Many directors already have life insurance that is paid for personally out of their already taxed incomes. Others let the company pay but get a P11D benefit in kind issue as the policy is an employee benefit. The advantage of the relevant life policy is that the company can pay and class the premium as a business expense, as there is no P11D benefit in kind issues and the company can usually claim corporation tax relief too it saves a higher rate tax payer around 49%. In this guide we will explore the relevant life policy in more detail so you can decide whether these are right for you or not.

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Page Contents

Relevant Life Video

What is a relevant life policy?

Typical clients that I have helped with RLPs

HMRC rules and how accounts should look at these.

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Click play to watch the video explaining more about relevant life policies.

The video below explains more about the relevant life policy, who they can help, how they could help you and how they work.

[vimeo id=”266520351″]

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Why have Relevant Life Insurance

Reason 1 – Tax savings. The reason to take a relevant life insurance policy is typically the same as for any other type of life insurance. Either to protect ones family from the loss of a breadwinner or carer, or to pay off a debt such as a mortgage. However for company directors of small limited companies, relevant life policies are a much more tax efficient way for that person to pay for this. As you can see from the screen shot of the relevant life savings calculator. Typically a higher rate tax payer paying a £90 per month premium out of their own pre-taxed income would have costs of £141.26 to actually pay the £90 premium. On the other hand if the premium was paid via the limited company then the net costs would be £72.00. A massive saving of 49%. Feel free to use our interactive savings tool to see exactly what you could save. You can enter your personal income tax band and your anticipated or existing monthly premium.

Reason 2 – Significant pension pots. So if you do have a need for life insurance and you work through your own limited company, due to the savings it makes sense. However relevant life policies are also useful for high earning individuals with large pension pots. Whereas a normal death in service scheme sum assured forms part of the individuals lifetime allowance, the death in service provided by a relevant life policy is no non registered and does not contribute to lifetime allowance. Thus upon a death claim if the individual’s sum assured and pension pot goes above the lifetime allowance then the sum above the threshold would be taxed at 55%. If the sum assured was with a relevant life policy the tax charge would not apply.

Reason 3 – Employee benefits. Many small companies and even sole traders do not have enough employees to qualify for a group life insurance scheme If you only need to insure 2 to 4 employees and group schemes want at least 5 employees then a relevant life policy is a good alternative. What’s more is that a relevant life policy does not need to be restricted to 3 or 4 times remuneration in some instances it can go as high as 25 times remuneration or more.

Types of clients we have helped with Relevant Life Policies.

IT Contractors – I would say without a doubt that the most common client that we have helped with relevant life policies is the IT Contractor. Typically these clients have worked in the finance industry many for large banking institutions. These banks and insurance companies usually provide a death in service scheme of 3 or 4 times annual salary as a life policy for their employees. When the IT Contractor leaves the security of working for the bank they also lose their death in service policy. Thus these clients are looking for a tax efficient ways provide life cover. The relevant life policy fits the need perfectly. Many of these smaller limited companies which the IT contractors work through also have the IT contractors wife or partner as an employee or director. In cases such as these the contractors often want 2 policies, one for each of them

Small Business Owners – Many other clients that we have helped have been trades people working through their own limited companies such as engineers, plumbers, builders, GPs, business consultants, artists, photographers, oil industry contractors, gas engineers and literally any other company director of a small business. The only requirement is that the business needs to be a limited company.

Larger Limited Company Death in Service Schemes For small limited companies that have a few employees but not enough employees to qualify for a group death in service scheme then relevant life policies offer an excellent way to provide this employee benefit. We have helped some clients from first start up and arranging their own relevant life policies to them growing and each time they take on another employee we set up a new death in service policy for the new employee. This is a very attractive way of arranging death in service for the employee. The company email us the new employees name, date of birth, smoker status, their remuneration, sum assured required and expected retirement age. A quote is then emailed to the company to be approved. Once we get the go ahead we arrange a convenient time to run through the application with the employee and sort all the paperwork / trust forms out with the employee directly leaving you to concentrate on running your business.

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HMRC and Relevant Life Policies

Firstly Benefit in Kind
The issue of the company paying the premiums and not having them taxed as a benefit in kind on the directors. This is not a matter of discussion with the local inspector as the legislation (s247 FA 04) clearly removes this charge to income. The product works on this basis alone giving approximately a 1/3 saving in tax for a higher rate taxpayer in a 20% CT paying company.

Secondly Corporation Tax Relief
There is the issue of corporation tax relief on the premiums. This is where the “wholly and exclusive” rules come in and we cannot be 100% definitive. It is down to the accountant and eventually the local tax inspector should the accountant not be happy to claim the relief . Our opinion is, that as long as the policy can be shown to be part of the normal remuneration package of the employee it is “wholly and exclusively” for the purpose of trade, but we realise that some inspectors may wish to challenge this on the grounds that it is not necessary to provide such a benefit to secure the services of that employee, especially if they are also owners. But if you pursue that argument you would also disallow relief on salary and pensions! We would say that the benefit should be in line with the work done in the business, so a wife who does not actually contribute any significant amount to the business has an RLP then relief could be a problem on her – just as large pension contributions are related to the input / remuneration of the employee. However she can still have the policy and will still benefit from it not being a BIK.

The problem is, because this is a relatively new concept there is little or no guidance in the HMRC manuals so they have to be viewed under the same guidelines as registered schemes and pension payments. The normal guidance for key person cover, HMRC manual BIM 45525, only partially helps us as it deals with policies for the benefit of the company. However it does point us in the right direction under the heading of “benefits paid direct to employees” which refers us to the guidance for pensions under BIM 46000 onwards, in particular for directors, BIM 46035.

Many accountants I speak to are claiming the relief on the basis that (a) it is a legitimate part of the remuneration the same as pension contributions, and (b) it is unlikely HMRC would ever drill down that far to challenge it – after all we are dealing with fairly modest amounts of money in relation to overall turnover. Others will no doubt seek clarification beforehand – we have had little feedback on this yet, probably because it is a little early for returns to be made.

Thirdly Sum Assured The last issue is the sum assured. Because this is paid through the RLP trust outside of the company and directly to the beneficiaries there is no tax liability on the company, nor is there any income tax liability on the beneficiaries. No income tax charge arises on the beneficiaries unless the whole arrangement had been set up outside of the legislative requirements, and the insistence on the use of an appropriate trust are designed to ensure this does not happen.
The only possible tax that could arise is a periodic charge to IHT under the normal discretionary trust rules. This could only arise if death occurred just prior to a 10 year anniversary and the trustees were unable to distribute the assets from the trust in time. Could happen but unlikely. Max tax charge would be 6%. We are clear about this in the literature.

I would point out that RLPs are not substitutes for registered schemes. Registered schemes will normally be cheaper and have a slightly better tax treatment on claim in that there it does not come under the normal discretionary trust regime described above. RLPs are aimed to fill the gaps that Registered schemes don’t cover – especially on a single life and/or high earner basis.

Ring Damian on 07912 076990 or
Contact Me By Email…