Protecting the small business market

Relevant life insurance is tax-efficient for the employee as HMRC usually views the premiums as an allowable business expense for the employer and does not view it as a benefit-in-kind for the employee.

Therefore, the employee does not have to pay income tax or national insurance on the premiums – as they would if the business simply paid for a personal policy. This can be a significant saving on the cost of life insurance for a higher or additional rate taxpayer.

In addition, any pay-out is tax efficient for the beneficiaries, as they are paid free of income tax and, usually, inheritance tax liability as the policy must be written in trust. Neither does any pay-out count towards the employee’s lifetime pension allowance as it is a ‘non-registered’ scheme.

Finally, the employer can also claim tax relief on the premiums as long as the local inspector of taxes is happy that the premiums are ‘wholly and exclusively for the purpose of trade’ as part of the employee’s remuneration and, as the benefits are written into trust on behalf of the employee, they are not viewed or taxed as business assets.

Features and benefits of relevant life insurance include:

• Single life cover that pays out if the insured dies or is diagnosed with a terminal illness;

• A sum assured that is level or can increase in line with the Retail Price Index (RPI) up to a maximum of 10% each year;

• The policy is written in a discretionary (split) trust from the outset, so the benefits are paid to the insured’s beneficiaries free of income tax and IHT;

• It is available for employees aged between 17 and 74 years (maximum age on entry is 71 years).

When you are advising your clients, trusts should always be considered as part of any life insurance arrangement. This is even more important for your business clients.

In the case of relevant life insurance, it is vital to demonstrate that the benefits are intended for the employee’s family and not the business in order for the policy to be eligible for tax relief.

This can be done using a trust. It can also ensure that any benefit is paid to the beneficiaries without delay (without going through probate), and in the most tax-efficient way.

The policy owner must write the cover into trust at the same time as they apply for the cover.  They must be a trustee together with the person covered; it may also be beneficial to appoint a third trustee.

The arrival of auto-enrolment and the introduction of the Small Business, Enterprise and Employment bill has opened up a huge opportunity for advisers.

As part of a holistic approach while you are discussing their business requirements you have the opportunity to talk about whether they have protection as it is the next logical step in meeting the needs of your clients.

Almost all of those who have business protection bought it following guidance from a trusted professional adviser, so it makes sense to highlight the potential cost of losing a key person to a client’s business.

Steve Casey is head of marketing & propositions at Ageas Protect