Relevant life policies can offer advisers an excellent path into the company protection arena. But how do they work? Jerry Bayman explains.
The first thing to note is that premiums paid by the employer do not create a P11D charge on the employee. S247 Finance Act 2004 removed the charge old unapproved schemes were subject to, thus creating a highly tax-efficient vehicle.
This becomes even more so when corporation tax is deducted. Premiums should normally be allowable as a business expense being it is part of the remuneration structure of the employee and therefore ‘wholly and exclusively’ for the purpose of trade.
Having it in their employment/service contract would help to cement this.
The table (see opposite page) highlights the effect on costs for a typical company which pays corporation tax at the 20% rate and a 40% tax-paying director. This shows the difference between paying for a personal policy out of post-tax income and how an RLP can create a 49% saving in overall costs.
Benefits are normally paid tax free through the employer trust. The only possible tax charge is a periodic and/or exit charge from the trust. These charges apply to all non-pension discretionary trusts but only arise if there is any value to the trust on any 10th anniversary. As an RLP is a term assurance then normally there is no value.
However, it could arise in the unlikely event of an employee dying just before a 10th anniversary and the claim not being settled and paid in time. The charge is 6% of the excess of the sum assured over the then nil-rate band. This can easily be avoided by setting up multi-policies and trusts under the Rysaffe principal as each trust will have its own nil rate band.
In a word – life cover. It would be good if we could graft critical illness and disability benefits on but the legislation will not allow this – not even waiver of contributions. However, terminal illness benefit is acceptable.
The benefit has to be a term assurance paid in a lump sum and cannot run beyond the age of 75. Cover can be level, increasing or decreasing and premiums can be level or renewable.