The questions that decide the tax
For any business policy, three questions shape the tax. Who owns it, the company or an individual? Who pays the premiums? And what is the money for: replacing lost profits, paying an employee's family, or repaying a debt or buying shares?
Company premiums are normally only allowable when they are paid wholly and exclusively for the purposes of the trade. Cover that protects capital, such as repaying a loan or funding a share purchase, is usually treated differently from cover that protects income.
Cover for employees and directors
Relevant life cover and executive income protection are built to be tax efficient. When HMRC conditions are met, premiums are normally allowable for corporation tax and the cover is not normally a P11D benefit. Executive income protection benefit is normally income for the company, but it pays the money out as salary, which is taxed through payroll.
Group life and group income protection usually follow similar rules. Group critical illness cover is the exception: because the employee receives the payout, the premium is normally treated as a benefit in kind, though the lump sum itself is normally tax free.
- Relevant life: premiums normally allowable, not normally a P11D benefit
- Executive income protection: premiums normally allowable, benefit taxed through payroll
- Group life: premiums normally allowable, not normally a P11D benefit
- Group critical illness: normally a P11D benefit, payout normally tax free
Cover for the business and its owners
Key person cover sits in the middle. Where the policy is a term policy protecting against loss of profits and the person is not a significant shareholder, premiums may be allowable, and the payout is then normally taxed as a trading receipt. If the premiums are not allowed, the payout is usually not taxed as income.
Loan protection and shareholder or partnership protection protect capital, so premiums are not usually allowable and payouts are not usually taxed as income. Shareholder cover is normally paid for by each owner personally, and the cross-option agreement behind it can matter for business relief on inheritance tax.
Inheritance tax and trusts
Inheritance tax matters most for cover paid to individuals. Policies written in a suitable trust normally pay out outside the insured person's estate, so the money is not counted when the estate is valued. Relevant life cover and most shareholder protection use trusts for this reason.
Shares in a trading company may qualify for business relief, which can reduce inheritance tax on them. The wording of the shareholders' agreement can affect that relief, which is why advisers favour options over binding sale agreements. Ask your solicitor to check the agreement alongside the trusts.
How Hi Tomorrow works with your accountant
We are protection specialists, not tax advisers. What we can do is explain clearly how each policy is owned, who pays and where the money goes, so your accountant has what they need to confirm the treatment before you commit.
Tax rules change, and HMRC looks at each business on its own facts. We would always rather you check with your accountant first than rely on a general description. Once you have their view, we compare the insurers on our panel and set up the policies to match.