Relevant life policy is a specialised insurance plan designed for business owners and employees. It offers a range of benefits, including tax efficiency, flexibility, and the ability to provide financial security for loved ones in the event of the policyholder’s death.
One of the most important benefits of relevant life policy is the Benefit in Kind (BiK). BiK is a term used to describe benefits that an employee receives from their employer in addition to their salary. These benefits can be in the form of goods, services, or cash payments.
Relevant life policy BiK is a valuable benefit for both employers and employees. For employers, it is a tax-efficient way to provide their employees with valuable life insurance cover. For employees, it is a way to receive life insurance cover without having to pay taxes on the premiums.
Benefits in Kind: An Overview
Benefits in kind, often abbreviated as BiK, are non-cash benefits provided to employees or directors by their company. These benefits can range from company cars and private medical insurance to gym memberships and childcare vouchers. The key characteristic that defines a benefit in kind is that it has a monetary value but is not part of the individual’s standard salary.
For directors, benefits in kind can be a valuable addition to their remuneration package. They can enhance the overall compensation without increasing the gross salary, which can be advantageous for both the director and the company. From the company’s perspective, offering benefits in kind can be a way to attract and retain top talent without necessarily increasing the payroll costs.
However, it’s essential to understand the tax implications of benefits in kind. In the UK, most benefits in kind are subject to taxation, and both the company and the individual have reporting obligations to HM Revenue & Customs (HMRC). The tax treatment can vary depending on the type of benefit, so it’s crucial to be well-informed to make the most out of these perks.
In the context of a Relevant Life Policy, understanding the nuances of benefits in kind becomes even more critical. As we’ll explore in the next section, a Relevant Life Policy can qualify as a benefit in kind under specific conditions, offering tax advantages that are worth considering.
How Does a Relevant Life Policy Qualify as a Benefit in Kind?
A Relevant Life Policy can qualify as a benefit in kind, but there are specific criteria that must be met for this to happen. The primary condition is that the policy must be set up in a particular way, known as a ‘discretionary trust arrangement.‘ In this setup, the company pays the premiums, but the benefits are paid out to a trust, which then distributes them to the beneficiaries chosen by the individual insured.
The advantage of this arrangement is that it allows the Relevant Life Policy to be treated as a benefit in kind rather than as a P11D benefit. This distinction is crucial for tax purposes. A P11D benefit would be subject to income tax and National Insurance contributions, whereas a benefit in kind under a discretionary trust arrangement is generally not.
However, it’s essential to note that not all Relevant Life Policies will automatically qualify as benefits in kind. The policy must be solely for the purpose of providing a lump sum in the event of death or terminal illness, and it must not include other elements like critical illness cover or investment options. Additionally, the policy must end before the individual reaches the age of 75.
Meeting these conditions allows the Relevant Life Policy to be treated as a benefit in kind, offering significant tax advantages for both the individual and the company. It’s a complex area, and professional advice is often recommended to ensure that the policy is set up correctly. We would suggest you please get in touch with an insurance broker to know the latest rules and deals as they keep changing.
Warning:
- This information is for general guidance purposes only and should not be taken as tax advice. It is important to seek professional advice from a qualified financial adviser to ensure that you understand the tax implications of taking out a relevant life policy and to ensure that the policy is set up correctly.
- The specific criteria that must be met for a relevant life policy to qualify as a benefit in kind are complex and are subject to change. It is important to stay up-to-date with the latest tax legislation and to seek professional advice if you are unsure whether your policy qualifies as a benefit in kind.
- If you are an employer, it is important to ensure that you understand the tax implications of offering relevant life policy as a benefit to your employees. It is also important to ensure that you comply with all relevant employment law requirements.
- If you are an employee, it is important to understand the tax implications of receiving a relevant life policy as a benefit from your employer. It is also important to ensure that your employer has set up the policy correctly.
Benefits of relevant life policy for employers
There are a number of benefits for employers who offer relevant life policies to their employees. These benefits include:
- Tax efficiency: The premiums for relevant life policy are a tax-deductible expense for employers. This means that employers can reduce their corporation tax liability by paying the premiums for their employees’ relevant life policies.
- Employee recruitment and retention: Relevant life policy can be a valuable tool for attracting and retaining top talent. It is a benefit that employees highly appreciate, and it can help to create a more loyal and productive workforce.
- Business protection: Relevant life policy can be used to protect the business in the event of the death of a key employee. For example, if a business owner dies, a relevant life policy payout can be used to fund the purchase of the business from their estate.
Benefits of relevant life policy for employees
There are also a number of benefits for employees who receive relevant life policy from their employers. These benefits include:
- Tax efficiency: Employees do not have to pay tax on the premiums for their relevant life policies. This means that they can obtain life insurance cover at a lower cost than if they were to purchase a policy themselves.
- Financial security: Relevant life policy can provide financial security for loved ones in the event of the policyholder’s death. This can be especially important for employees with young children or elderly dependents.
- Peace of mind: Relevant life policy can provide employees with peace of mind, knowing that their loved ones will be financially secure in the event of their death. This can help employees to focus on their work and their personal lives without having to worry about their loved one’s financial well-being.
How to maximise the benefits of relevant life policy BiK
There are a number of things that employers and employees can do to maximize the benefits of relevant life policy BiK. These include:
- Choose the right policy: There are a number of different relevant life policies available on the market. Employers and employees should carefully consider their individual needs and circumstances when choosing a policy.
- Set the right cover level: It is important to choose the right level of cover for your relevant life policy. The cover level should be sufficient to meet the needs of your loved ones in the event of your death.
- Review your policy regularly: It is important to review your relevant life policy regularly to make sure that it still meets your needs. You may need to increase or decrease the cover level, or you may need to change the policy type.
Tax Implications for Directors
When considering a Relevant Life Policy as a benefit in kind, it’s crucial to understand the tax implications for both the director and the company. One of the most significant advantages of a Relevant Life Policy is its tax efficiency, but this is subject to certain conditions being met.
From the company’s perspective, the premiums paid for the policy are generally considered an allowable business expense. This means they can be deducted from the company’s profits, reducing the corporation’s tax liability. However, it’s essential to ensure that the policy meets the ‘wholly and exclusively’ rule for business expenses, meaning it must be solely for the benefit of the business and not have any personal elements.
For the director, the tax implications are equally favourable. As mentioned earlier, a Relevant Life Policy set up under a discretionary trust arrangement is not usually considered a P11D benefit. This means it’s not subject to income tax or National Insurance contributions. However, it’s crucial to consult with a tax adviser to ensure that the policy is set up correctly to take advantage of these benefits.
It’s also worth noting that the lump sum paid out in the event of death or terminal illness is generally free from inheritance tax, provided it’s paid into a discretionary trust. This makes a Relevant Life Policy an effective tool for estate planning as well.
In summary, a Relevant Life Policy can offer significant tax advantages as a benefit in kind, but it’s essential to ensure that the policy is set up correctly to maximise these benefits.
Conclusion: Is a Relevant Life Policy Right for You?
After exploring the intricacies of Relevant Life Policies and their qualification as benefits in kind, the question remains: Is a Relevant Life Policy the right choice for you as a director? The answer largely depends on your individual circumstances and financial goals.
A Relevant Life Policy offers a tax-efficient way to provide life insurance coverage, which can be a significant advantage for both the director and the company. The premiums are usually an allowable business expense, reducing the corporation tax liability. For the director, the policy is not typically subject to income tax or National Insurance contributions, provided it’s set up correctly.
However, it’s crucial to consult with professionals to ensure that the policy meets all the necessary criteria. This includes setting it up under a discretionary trust arrangement and ensuring it’s solely for the purpose of providing a lump sum in the event of death or terminal illness. Failing to meet these conditions could result in the policy being treated as a P11D benefit with less favourable tax implications.
In conclusion, a Relevant Life Policy can be a valuable addition to your remuneration package as a director, offering both financial security and tax benefits. However, it’s essential to get professional advice to ensure that you’re making the most of these advantages.
Frequently Asked Questions (FAQs) on Relevant Life Policy in the UK
What is a Relevant Life Policy?
A Relevant Life Policy is a specialised insurance plan designed for business owners and employees in the UK. It provides financial security for the policyholder’s loved ones in the event of their death and offers benefits like tax efficiency and flexibility.
How does a RLP differ from a Personal Life Insurance Policy?
Unlike a personal life insurance policy, a RLP is paid for by the employer and is a tax-efficient way to provide life cover. The premiums are generally considered an allowable business expense, reducing the company’s corporation tax liability.
What is Benefit in Kind (BiK) in the context of a Relevant Life Policy?
Benefit in Kind (BiK) refers to benefits that an employee receives from their employer in addition to their salary. In the case of an RLP, the BiK is the life cover provided, which is generally tax-efficient for both the employer and the employee.
How can a RLP qualify as a Benefit in Kind?
To qualify as a Benefit in Kind, the RLP must be set up under a discretionary trust arrangement. The company pays the premiums, but the benefits are paid out to a trust, which then distributes them to the beneficiaries chosen by the individual insured. This setup generally exempts the policy from income tax and National Insurance contributions.
What are the tax implications for a company director who opts for a RLP?
For a company director, a RLP set up under a discretionary trust arrangement is generally not considered a P11D benefit, meaning it’s not subject to income tax or National Insurance contributions. However, it’s crucial to consult with a tax adviser to ensure the policy is set up correctly.
Q6: Can a sole trader benefit from a Relevant Life Policy?
A6: Relevant Life Policies are generally not designed for sole traders. They are more suited for limited companies offering life cover as a tax-efficient employee benefit.
Q7: What happens to the RLP if the policyholder reaches the age of 75?
A7: The policy must end before the individual reaches the age of 75 to maintain its status as a tax-efficient Benefit in Kind.
Q8: Can a Relevant Life Policy include Critical Illness Cover?
A8: No, a Relevant Life Policy must be solely for the purpose of providing a lump sum in the event of death or terminal illness. It must not include other elements like critical illness cover.
Q9: What are the reporting obligations to HM Revenue & Customs (HMRC) for Benefits in Kind?
A9: Both the company and the individual have reporting obligations to HMRC for Benefits in Kind. The tax treatment can vary depending on the type of benefit, so it’s crucial to be well-informed and consult a tax adviser.
Q10: How can a Relevant Life Policy be used for business protection?
A10: A Relevant Life Policy can protect the business in the event of the death of a key employee or business owner. The lump sum payout can be used to fund the purchase of the business from their estate, ensuring business continuity.