26 July 2012

Life assurance paid for by the company

Q: I am a director of a limited company and want to take out some form of life cover. Is it possible for the company to make the payments on my behalf and if so are there any possible tax consequences?

A: When looking at life cover paid for by your employer you do have to be careful of the potential tax consequences.  One of the most tax efficient life policies is a Relevant Life Policy.

This is a term assurance affected by an employer on the life of an employee and funded by the employer.

It provides for a lump sum benefit payable either on death or the diagnosis of a terminal illness of the employee during their period of employment. The policy does not provide any other benefits and does not have a surrender value at any time. In order to meet the criteria, the death benefits from this type of arrangement have to be paid into a specially designed trust.

There are several advantages to using this type of arrangement rather than, for example, a Group Death in Service scheme or personal life cover.

First, the death benefit lump sum will not form part of your pension lifetime allowance. The lifetime allowance was set at £1.8m although the government reduced this to £1.5m from 5th April 2012. Therefore a situation might occur whereby if you took out death in service via work, the combined pension fund and death benefit values could exceed the lifetime allowance. In this event a 55% tax charge would be levied on the excess amount. However, this could be avoided via a Relevant Life Policy, as the death benefits will not be assessed against the lifetime allowance.

Secondly, it is tax efficient. Premiums paid by the employer are generally be treated as a business expense for tax purposes and premiums are not treated as a benefit in kind for the life assured. Neither do the premiums form part of the employee’s annual allowance and are not assessable by the employer or employee for National Insurance contribution. The benefits arise free of income tax.

You do not pay premiums out of net income and there is therefore a cost saving of 20% compared to personal life cover.

Finally, while the death benefit is payable through a discretionary trust, generally it will be paid free of inheritance tax and will not form part of your estate for inheritance tax purposes, although this cannot be guaranteed.

As with all these arrangements it is essential you take professional advice from someone that is suitably qualified.

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