Company directors that have life assurance in place, to protect their families, could be paying more tax than needed if they fail to seek financial advice.
Relevant life policies are a way of providing death-in-service benefits on an individual basis, no matter what the size of your business is. As they are not classed as a ‘benefit in kind’, no tax is payable on the premiums. In most cases the benefits are paid free of inheritance tax, if they are paid through a discretionary trust.
Unlike a registered group scheme, the benefit will not form part of the employee’s annual or lifetime pension allowance.
The advantages of using a discretionary trust:
- It is the most practical way to meet legislative requirements
- The life cover beneficiaries that can be included are typically family members and dependents
- Having benefits paid through a trust ensures they cannot be taxed as part of the company’s trading income, and they do not form part of the company’s assets
- It allows trustees to be flexible in who they pay benefits to but the employee can give guidance to the trustees by completing a nomination form
- Benefits are usually able to be paid free of income tax and inheritance tax
- Cover up to a maximum of £5,000,000 can be applied for
- The maximum cover is 15 times the employee/director’s remuneration package, which can include their salary, dividends and any benefits in kind
Life cover policies are particularly suitable for:
- Company directors whose companies can pay for life cover and then offset the premiums against corporation tax
- SMEs that do not have enough eligible employees to make a group life scheme a viable financial option
- Employees or directors that have a significant income and a substantial pension fund, who do not want their benefits to form part of their lifetime allowance
To be eligible for tax concessions through a trust, there are certain conditions that must be met. A sound life cover policy is needed in order to ensure that intended beneficiaries are financially provided for, without having to pay unnecessary tax. For more information on life cover for business directors, please contact us.