Relevant Life insurance coverage must meet precise legal requirements to be valid. But, what is Relevant Life cover and what are the tax concessions? Continue reading to find out.
What is Relevant Life insurance?
Relevant Life insurance provides a cost-effective way for employers to take out coverage for the life of an employee, including directors. The coverage is designed to pay a lump sum benefit that’s payable to the employee’s family if the person who is covered dies or is diagnosed with a terminal illness during employment.
What are the statutory conditions of Relevant Life insurance?
Relevant Life insurance coverage was formed from changes to pension legislation applied after April 2006. Changes allowed employers to set up different unregistered schemes for employee benefits with varying tax implications.
A Relevant Life cover is considered a death-in-service benefit and neither a registered pension scheme nor an employer-financed retirement benefits scheme (EFRBS). As a result, this means that the policies escape tax charges so long as they meet the statutory conditions in subsections 393B(4), (b) and (c) of the Income Tax (Earnings and Pensions) Act 2003 (ITTOIA).
To meet the strict statutory conditions, a Relevant Life cover must be one of the below:
- Expected group life policy, defined in Section 480 of the Income Tax (Trading and Other Income) Act 2005 (ITEPA).
- Life Insurance covers providing payable benefits following the death of a person (meeting Condition A in Section 481 of this Act, or meeting Conditions C and D in Section 481 and Conditions A and C in Section 482).
- Life insurance that would be under a) or b) but provides an excluded benefit under paragraphs (a), (b), or (d) of subsection 3 of the ITEPA Section 393B.
The specific conditions of the ITTOIA that are mentioned above are:
- Condition A, Section 481: Under the policy terms, a capital benefit becomes payable on the death in specified circumstances of the insured individual if they die under the age of 75.
- Condition C, Section 481: The policy has zero surrender value, or a value exceeding the proportion of paid premiums.
- Condition D, Section 481: No sum or benefit is payable under the policy other than mentioned in A and C.
- Condition A, Section 482: Any payable benefit must be conferred to a beneficially entitled individual or charity by a trustee.
- Condition C, Section 482: Tax avoidance must not be the primary aim of the policy for the holder or beneficiaries.
What are the tax implications of Relevant Life insurance?
If the Relevant Life insurance policy meets the statutory conditions above, the available tax implications are:
- Premiums aren’t part of the employee’s annual allowance for registered pension scheme contributions.
- Benefits won’t count as part of the employee’s lifetime allowance for their pension.
- Employers can treat the premiums they pay as a business expense.
- Employees don’t have to pay benefit-in-kind tax on premiums.
- Neither employers nor employees need to pay National Insurance contributions for premiums.
- Payments to beneficiaries are free from income tax and inheritance tax.
Policies that do not meet the conditions will be considered EFRBS, and will not be eligible for tax allowances.
The trust could be legally liable for inheritance tax charges during its existence in the following circumstances:
- Periodic Charge: Up to 6% of the value of the fund over the nil tax band could be payable on every tenth anniversary of its creation.
- Exit Charge: When the benefit leaves the trust after the first 10 years, the rate of tax paid at the previous tenth anniversary could be payable.
However, in the majority of cases, it is unlikely that the trust pays any inheritance tax.