What is a relevant life policy?

It is a Self Assurance Term Business plan applied for by an employer on the life of a single employee. It must include lump sum death benefit only. Written under a Discretionary Trust, the plan provides death in service benefits without a group life scheme for the benefit of the employee’s family. If certain legislative requirements are met, the plan can offer significant tax benefits for employer and employee.

 

Relevant life policies are governed by the same legislation that deals with group schemes – the Income Tax (Earnings and Pensions) Act 2003. However, unlike most large employer provided schemes they are 'non–registered', so are not subject to tax in the same way as registered group life schemes.

 

What do they do?

Relevant life policies provide life cover for the benefit of employee's and director’s dependants paid through a discretionary trust. They are taken out and paid for by the employer.

 

Who is allowed to have a policy?

Any employee of a business, including directors. The business can be a limited company, a limited liability partnership, a partnership, a charity or a sole trader.

 

However, sole traders or equity partners or members cannot be the life assured. 

 

'Salaried' partners (those who are not being taxed on trading income) can be covered.

 

What is the target market?

• Small businesses that would like to be able to offer death in service benefits to their employees, but have too few members for a group scheme.
• High earners who do not want their death in service benefits to count towards their lifetime pension allowance.
• Employees who are looking to top up the death in service benefits they receive from their employer’s registered group scheme.

 

Why are they tax efficient?

Premiums

• Premiums paid by the employer are not treated as a P11D benefit and there will be no charge to Income Tax for the employee in respect of premiums. 
• There are no National Insurance implications on either the employee or the employer. 
• Subject to the local inspector of taxes accepting that the premiums are 'wholly and exclusively for the purpose of trade' they may qualify for relief as a trading expense. It is difficult to be precise on this, as different inspectors and accountants may have different views. We are not aware of any HMRC precedent.
• Premiums do not count towards the annual pension allowance for tax purposes.

 

Benefits

• Benefits are payable free of Income Tax.
• Benefits are normally free of Inheritance Tax. In specific circumstances there could be a periodic tax charge on the trust. For full details on this see the 'Trust' section below.
• Unlike lump sums paid under a registered scheme, relevant life policy benefits do not form part of the employee's lifetime allowance for pensions. There is a limit (£1.5 million for tax year 2013/2014) that you can accumulate over a lifetime in your pension 'pot'. Any lump sum payments (as opposed to dependant's pension) under a registered scheme fall into this pot and any payments to the estate in excess of this are taxed at 55%, so a relevant life policy may be a useful vehicle for high earners to opt out of a group life scheme.

 

Are there any restrictions?

Yes. To qualify as a relevant life policy and become eligible for the associated tax benefits there are certain legislative requirements the plan has to meet:

• It must provide only lump sum death benefit. No disability, critical illness or premium payment benefits are allowed. 
• The term cannot exceed the 75th birthday of the employee. 
• No surrender value.
• Benefits must be payable to an individual or charity, or to a trust for the benefit of an individual or charity. The plan must be written under a Relevant Life Policy trust to ensure this requirement is met. 
• It must not be set up for tax avoidance purposes. For this reason, the employer is not included as a discretionary beneficiary.

 

What type of lump sum death benefit can be written?

Death benefit can be level, decreasing or increasing cover.

 

Can cover be increased?

Yes. If the RPI increase option is selected, cover can be increased each year without evidence of health.

 

Other increases can be requested at any time, but will be subject to underwriting.

 

How much cover can be provided?

Since 'A' day the statutory limits on the amount of cover that can be provided have been removed. However, we have financial limits on cover. This is 15 times the annual remuneration of the employee if they are aged 40 or older. The limit is 20 times annual remuneration for individuals aged up to 39. Remuneration can include salary, bonus, and regular dividends paid in lieu of salary plus any taxable benefit in kind.

 

There is no need for financial underwriting up to £2.5 million for each employee, but beyond that we do need evidence of earnings. This could be a copy of a P60 or 3 months' salary slips or a letter from the employer confirming income. For a small company we might ask for confirmation from the accountant or copies of the accounts to show dividend income.

 

Can different benefits be provided?

A relevant life policy can only include death benefit. Multiple death benefits with different terms and/or sums assured can be included within a plan, provided they are all for the purpose of providing cover for the employee’s dependants.

 

You cannot use the same plan for other purposes, for example key person or ownership protection benefits.

 

How does the trust work?

Relevant Life Policy trust's should be set up under a discretionary trust. Normally it includes a pre-printed list of potential beneficiaries that includes the spouse, civil partner and any children of the employee. Non-family members, such as an employee’s live-in partner or a charity could be added.

 

The employer is automatically a trustee, but we require at least one additional trustee to be added. We normally recommend that additional trustees are officers of the company (director/company secretary/co-partner or member) to reinforce the commercial aspect of the arrangement.

 

The employee can be an additional trustee, but if this is the case a further additional trustee would be required in the event of the employee’s death (unless a corporate body is a trustee).

 

For single person companies with no company secretary, the additional trustee will usually be an external person. It could be a spouse or the company's accountant or solicitor. On death of the sole director, the trustee duties of the company will have to fall onto the executors or administrators of the estate who will either carry out those duties or appoint someone else.

 

In all cases we recommend that the employee completes a nomination form to guide the trustees as to who they would like to benefit from the proceeds. This does not bind the trustees, but generally they should consider the employee’s wishes. A nomination form is included at the end of our specimen Relevant Life Policy trust form.

 

Trust Taxation

In exceptional circumstances an Inheritance Tax periodic charge could be levied on any assets in the trust on a 10-year anniversary of the date the trust was created. For this to happen, the member must either have died and the benefit paid is still held in the trust at the 10-year anniversary, or the member may be seriously ill at the 10-year anniversary and the policy is still held in trust. The charge would be a maximum of 6% of the assets in the trust in excess of the nil rate band (£325,000 2013/14).

 

If a 10-year charge arises, there could also be exit charges when assets are distributed to the beneficiaries. This could be up to 6%, if the assets remain in the trust for the next 9-plus years. However, assuming benefits are paid out just after the anniversary the charge should be insignificant.

 

It is unlikely that these charges will apply in the vast majority of cases.

 

Can the trust be incorporated with a will trust?

Yes. It is possible to nominate a will trust, such as a spousal bypass trust, as a potential beneficiary. The employer can add the bypass trust to the list of potential beneficiaries when completing the trust form. Alternatively, the employee could nominate that trust using a nomination form.

 

Is there a replacement policy option?

No – it is not needed. If an employee leaves to join a new employer, the plan can continue to be held in trust. The original employer could retire as a trustee and the new employer could be added as a trustee. The new employer would then take over payment of the premiums and provided that the legislative requirements are still being met, the plan should continue to qualify as a relevant life policy. We can provide a specimen form to change trustees.

 

If the employee leaves the business and the plan is no longer intended to be used for death in service benefits, it is possible for the employee to take the plan with them and maintain the cover as personal protection. The employee would take over payment of the plan and could even put it into a personal trust if they choose to.

 

There is a 2-step process. Firstly, the trustees would need to make an absolute (irrevocable) appointment in favour of the life assured. Secondly, the trustees would then need to assign the policy to the life assured. The plan will cease to qualify as a relevant life policy and will no longer be eligible for tax benefits. In certain circumstances there could be a benefit in kind charge for the employee – for example, if the life assured is in serious ill health. We can provide a specimen form that includes both steps - the Scottish Provident Relevant Life Policy Trust Deed of Appointment and Assignment.

 

These options may be better than those offered under a group scheme. Some schemes do not offer a replacement policy, while those that do, the replacement policy can be expensive.

 

For more information please click here.