In 2006 a new type of life cover was introduced: the Relevant Life Policy or “RLP” (though sometimes also known as Relevant Life Cover) which is designed to act as a proxy to the typical ‘death in service’ cover that is provided to employees as part of their pension package, which pays out a multiple of their income as a tax free lump sum to loved ones on death.
This new product instantly became successful as it filled a gap to small businesses that had no way of providing such cover in a tax efficient manner and are too small to qualify for a group scheme. It is therefore extremely popular with Controlling Directors of their own limited company, such as contractors”¦
Who can take out the cover?
Relevant Life Plans have been designed for use by an employee, including directors of a business. They are not available for Equity Partners of a Partnership, Equity Members of a Limited Liability Partnership, sole traders or anyone who is not an employee. Shareholders of a limited company who are not employees or paid directors are also exempt from the cover.
For contractors, in a typical husband/wife scenario as shareholders, two individual policies could be taken out if necessary, as long as both are drawing a salary.
The cover can also be used by existing members of a group life scheme who want to top-up their benefits but are limited in the amount that is provided through their current scheme.
A little known and very important fact, in addition to topping up, it is also tax efficient way of taking out additional cover for those that will be affected by their pension Lifetime Allowance, as death-in-service pay-outs provided via a pension scheme count towards this allowance.
While the contributions will be paid for by the company, they will not be treated as a benefit in kind on the life assured. Furthermore, contributions paid to fund the plan should be treated as an allowable business expense for the company and is dependent on how the arrangement is viewed by the Inspector of Taxes as it has to satisfy the wholly and exclusively rules.
The company will need to establish that any such contributions are made “wholly and exclusively” for the purpose of trade, profession or vocation. This means the local Inspector of Taxes must be satisfied that the total remuneration package is commercially reasonable for work undertaken by the individual concerned e.g. this policy should therefore not be taken out to cover one’s personal mortgage.
To obtain the tax advantages, the RLP must meet the following criteria:
- Cover must be paid out in a single lump sum before the age of 75
- Plan cannot have a surrender value
- Benefits must be paid through a discretionary trust
- Beneficiaries are restricted to family members and dependents of life assured
- The main purpose of the plan must not be for tax avoidance
What level of cover is available?
Cover is based on a multiple of salary. For contractors this can include both salary and dividends.
The cover does typically not include Critical Illness cover (though one provider does provide a dumbed down version), as this would typically taken out as a separate policy paid for on a personal basis.
What happens if I close my company down?
Because of IR35, some may be affected by these rules and must switch to a PAYE system and therefore no longer able to pay themselves through their limited companies in the same way. For those who have taken out an RLP, this does not necessarily mean that the cover comes to an immediate end (though one can terminate it if no longer needed at any point).
It is normally possible to switch the policy from being employer based to personal cover, without further underwriting. The insurance company would need to approve this and issue a new Direct Debit mandate. Switching from a company-based plan would mean that one would lose the tax efficiency, but at least still be able to keep the cover. One would also lose terminal illness cover, and going forward, it would not be possible to switch back to it being company based if ever circumstances were to change.
How are benefits paid out?
Relevant Life Policy plans are always written into a master discretionary trust at outset, which means that the benefit will be paid free from of Income and Inheritance Tax to the policy holder’s chosen beneficiaries, as per the “Expression of Wish” form which is completed alongside the trust form at inception. It also escapes the lengthy process of probate, such that proceeds can be paid out swiftly.
At point of transfer, the proceeds will then form part of the estate of the beneficiaries. To avoid a future Inheritance Tax charge on these benefits, the funds on death can be paid into an Asset Preservation Trust. Here normal trust rules apply, regarding periodic and exit charges, though is usually not as expensive as getting taxed at 40%.
It is crucial that advice is taken to ensure that one’s personal circumstances are taken into consideration and that one does not fall foul of the rules. Please contact your account manager who will be able to introduce you to a qualified advisor who will be able to source competitive rates and provide advice.