For adviser use only. Your Guide to Relevant Life Policies

For adviser use only Your Guide to Relevant Life Policies

Your guide to relevant life policies Welcome to the Scottish Provident guide to relevant life policies. In this guide you will find all the information you need to understand the tax benefits and advantages of employer sponsored single life plans. It will also show you how to set the plans up, complete the trust documentation and submit the documentation to Scottish Provident. Important note The information in this brochure is based on our understanding of tax law and practice at the date of publication. It may be affected by future changes and individual circumstances. Contents P3 An introduction to relevant life policies P5 The tax advantages of relevant life policies P8 A summary of the benefits of relevant life policies P9 Conditions to qualify as a relevant life policy P10 Technical options of a relevant life policy P11 Documentation and process P14 The legislation P16 Contact us 2

An introduction to relevant life policies A relevant life policy is an alternative way for an employer to set up life cover for an employee in a tax efficient manner, without using a registered death in service group scheme. It is set up on a single life basis and is available for small businesses that might not normally be able to access this type of death in service cover. They are designed to meet the requirements of a single life relevant life policy under S393B(4) of the Income Tax (Earnings and Pensions Act) 2003. Relevant life policy suitability A relevant life policy is available for an employee of any type of business, including a director of a limited company (Schedule E tax payers). However, it is not aimed at an equity partner or member or sole trader (taxed under Schedule D). Relevant life policies are available to the following three groups: 1 Small businesses that do not have enough employees to warrant a registered group life scheme. Group life providers will not usually offer schemes for businesses that have less than five employees, and even if they were willing to do this, for legislative reasons they cannot offer a registered scheme on a single life basis. This means that many small businesses are effectively excluded from taking advantage of those benefits enjoyed by larger businesses. Because relevant life policies can be written on a single life basis, even smaller businesses can take out cover. 3

Your guide to relevant life policies 2 Certain high earning employees who may exceed the pension lifetime allowance. Registered group schemes come under pensions legislation, and this means that any lump sum benefits paid on death are added to the employee s pension funds when calculating the maximum allowance an individual can accumulate during their lifetime (currently 1.25 million 2015/16). If this allowance is exceeded there is a tax charge of 55% on the excess. Relevant life policies are non-registered. This means that they do not count towards the pensions lifetime allowance. Some high earners may have protected the amount in excess of the lifetime allowance limit to avoid the charge, but as a result they could not contribute any further amounts to their pension. Becoming part of a registered death in service scheme would count as a further contribution, so a relevant life policy can be particularly useful for this type of employee. 3 Members of group life schemes who want to top up their benefits. Some group life schemes have very restrictive rules with regard to the amount of benefit that can be provided. They can also have restrictive definitions of remuneration, often discounting overtime, bonuses and dividends. A relevant life policy can be used to top up these benefits in a tax efficient way. 4

The tax advantages of relevant life policies When an employer is considering death benefit for an employee, it is important to consider the cost of the premium and the true cost of providing for it. The premiums Premiums are paid by the employer, but are not normally treated as income in the hands of the employee, for example, a P11D benefit. Provided that the plan qualifies as a relevant life policy, by meeting the legislative requirements (described on page 14), there will be no charge to income tax for the employee in respect of the premiums. This also applies to National Insurance, which will not be due by the employer or employee in relation to the premiums, where the plan qualifies as a relevant life policy. The employer may be able to claim tax relief on the premiums as a trading expense of the business. The local inspector of taxes would need to be satisfied that the premiums would qualify under the wholly and exclusively rules. As a relevant life policy is not a registered group life scheme, premiums do not form part of the employee s annual pension allowance, but this also means that corporation tax relief on contributions is not guaranteed in the same way as a registered group life scheme. 5

Your guide to relevant life policies The example below illustrates the effect of taxation on the true cost of providing the same net premium, depending on how cover has been arranged. The plan on the left is owned by the employee, with the employee paying the premium from their net (post-tax) income. The plan on the right is a relevant life policy. Employee-owned Relevant life policy and paid plan Premium 1,000 1,000 Company gross cost Income tax @ 40% Employee s National Insurance contribution @2% Employer s National Insurance contribution @13.8% 690 34 238 Total company gross cost 1,962 1,000 Company net cost Corporation tax relief @20% 392 200* Total company net cost 1,570 800* * For the purpose of the example, it has been assumed that corporation tax relief at 20% has been granted under the wholly and exclusively rules. The example assumes a premium of 1,000 each year to provide death benefit on the life of an employee who is paying income tax at 40% and employee s National Insurance at 2% on the top end of income. We have also assumed that the employer is paying corporation tax at the small profits rate of 20% and will pay employer s National Insurance at the contracted in rate of 13.8%. As the example demonstrates, a Scottish Provident relevant life policy could result in savings for a business when compared with an employee-owned and paid plan. 6

Tax treatment of premiums for an employee-owned and employer-paid life policy If the employee owns the plan and the employer pays the premium, the payment by the employer will be treated as the employer meeting a pecuniary liability of the employee. This is where the employee has entered into a contract, which involves the payment of premiums, but the employer meets the cost on behalf of the employee. Therefore, the employee is liable to both income tax and employee s National Insurance contributions on the premium. To provide the total cost of the plan, the amount of tax and National Insurance payable on the premium must be taken into account. The employer will usually be able to treat the gross cost as a trading expense, whether paid as salary or if the employer has paid the premium. Tax treatment of premiums for a relevant life policy The employer will set up the plan and pay the premiums. No income tax or National Insurance liabilities arise if the plan meets legislative requirements to qualify as a relevant life policy. Provided that the local inspector of taxes accepts that payment of the premiums has been incurred wholly and exclusively for the purpose of trade, the employer may be able to claim corporation tax relief on the premium. 7

Your guide to relevant life policies A summary of the benefits of relevant life policies Benefits paid on death do not form part of the employee s lifetime pension allowance. Benefits paid to the employee s dependants through a discretionary trust, known as the relevant life policy trust, will not involve an income tax charge for the employee. Benefits paid to dependants through a relevant life policy trust will be outside of the business, meaning the employer will not be subject to corporation tax or income tax. Benefits paid through the relevant life policy trust do not form part of the estate of the deceased employee and are therefore generally free of inheritance tax. Because the relevant life policy trust is a discretionary trust, it will be subject to the normal inheritance tax treatment applicable to discretionary trusts, known as the relevant property regime. In certain circumstances the following charges can arise: Periodic charge Up to 6% of the value of the trust fund in excess of the nil rate band ( 325,000 2015/16), on each tenth anniversary of the date the trust was established. A periodic charge will only apply if there is a value within the trust at a tenth anniversary. This could happen if, for example, the employee dies shortly before a tenth anniversary and the benefits have not been distributed to the beneficiaries. Exit charge Up to 6% of the value of the trust fund, on transfer of benefits out of the trust to a beneficiary. The actual tax charge may be less than 6%, as the rate of tax paid will depend on how many quarters have elapsed since the last periodic charge. 8

Conditions to qualify as a relevant life policy There are a number of conditions laid down in the legislation that a plan must meet in order to qualify as a relevant life policy and become eligible for the associated tax benefits. The plan must provide for a lump sum on death before the age of 75. It cannot provide an annuity. The policy cannot provide any other benefits such as critical illness benefit, disability income benefit or premium payment benefit. The policy cannot normally have a surrender value. This is not an issue with Self Assurance as it is a term assurance plan, so will not acquire a surrender value. Any benefit must be paid to an individual or a charity and this can be paid through a trust. The Scottish Provident relevant life policy is issued under a discretionary trust, as the employer will complete a Scottish Provident relevant life policy trust form. The main purpose of the policy must not be tax avoidance. HM Revenue & Customs (HMRC) guidance refers to tax avoidance as situations where less tax is paid than Parliament intended, or more tax would have been paid if Parliament had turned its mind to the specific issue in question. Current legislation provides for relevant life policies and sets out the tax treatment of them. However, if doubt exists as to whether individual circumstances are such that HMRC may consider an arrangement to be mainly for the purpose of tax avoidance, the business s accountant may be able to advise or seek clarification from HMRC. If a plan fails to qualify as a relevant life policy, the tax benefits will not apply. Further details of the legislation can be found at the end of this guide. 9

Your guide to relevant life policies Technical options of a relevant life policy Term of the cover Cover can be set up using a Self Assurance business plan for any fixed term from 5 to 40 years. However the cover cannot run beyond the employee s 75th birthday. Cover can also be set up on either a 5 or 10 year renewable basis as long as the renewed policy does not run beyond the employee s 75th birthday. Type of cover The policy will be a term assurance plan with no surrender value. The sum assured can be level throughout the term or it can increase with the RPI index up to a maximum of 10% each year. Cover can also be taken out on a decreasing basis. Premiums Premiums are paid by the employer and can be paid monthly or annually. Amount of cover We will accept an application for cover up to 15 times the remuneration of the employee for clients aged 40 and older and up to 20 times the remuneration of the employee if they are aged up to 39 (this is not a legislative restriction). Remuneration can include salary, bonuses, taxable benefits in kind and regular dividends in lieu of salary. For applications in excess of 2.5 million we will need evidence of earnings. Options available if an employee leaves employment There are two options available if an employee leaves the employer. Firstly, the trustees could complete an absolute appointment of the plan in favour of the employee. This means the plan will be held on a bare trust for the employee. Thereafter, the trustees could transfer ownership of the plan to the employee by assigning it. The employee could then continue the plan as personal cover. The employee would have to pay the premiums and would lose the tax advantages, but cover can be retained. We can provide a specimen deed of appointment and assignment, a form that includes both steps. 10

Alternatively, the plan can be maintained by the new employer provided they agree to pay the premiums. This can be done by retiring the original employer as a trustee and adding the new employer as both trustee and payer of the plan. We can provide a specimen deed of appointment of new trustee/removal or resignation of trustee form. Documentation and process When quoting, the cover must be input as Self Assurance term business. Quotations Quotations can be obtained from The IRESS Exchange, Assureweb and Webline or through the Scottish Provident Adviser Webcentre in the normal way. A Self Assurance term business plan should be selected to provide a quotation for a relevant life policy. Application form Submit the Self Assurance application either online or by using a paper application form. The applicant will be the employer and the life assured will be the employee. They should each sign the application form. If the life assured is signing on behalf of the company as director, he should indicate next to the company signature that he is signing as director. As the employer will pay the premiums, the box on the application should be ticked to indicate that the applicant will pay the premiums. 11

Your guide to relevant life policies The plan must be written on a single life basis and the benefits must include lump sum death benefit only - multiple death benefits in the one plan for the same life assured will be allowed. It is important to check that the sum assured does not exceed Scottish Provident s underwriting limits. It is also important to be certain that the plan will end before the employee s 75th birthday. At the additional information section of the application, the employer should insert relevant life policy, so that the purpose of the cover will be clearly identifiable. The Scottish Provident relevant life policy trust A relevant life policy trust and nomination form should also be completed and posted to the address shown on the form. As the plan should not start until the trust form has been completed and accepted by us, the trust box on the application form should be ticked. If the plan is placed in trust at a later date, once the plan has started, there may be a capital gains tax liability in the event of a claim being paid. To avoid this, if the trust box has been ticked on the application form, we will not start the plan until a fully completed trust form has been received and noted against the application. The trust also demonstrates that the plan proceeds will be payable to individuals (the employee s dependants) which is one of the legislative requirements to qualify as a relevant life policy. 12

The employer (as the settlor of the trust, known as the principal employer) will be a trustee. An additional trustee must be added to act with the employer. If the employee is to be the additional trustee, a further additional trustee should also be added to ensure that there would be two trustees available to act in the event of the employee s death. In addition to our administrative requirement that an additional trustee must be added when the trust is created, the trust requires there to be at least two trustees at all times, unless a corporate body is a trustee. An additional trustee may be a family member of the employee, such as a spouse, or perhaps an independent trustee, such as a solicitor. The employee has power under the trust to change the trustees. Benefits are paid at the discretion of the trustees, who will decide which discretionary beneficiaries receive funds, when to pay and what amounts. It is possible for the employee to guide the trustees in their decision making and a nomination form is included in the trust to enable the employee to express their wishes. The nomination form does not bind the trustees, though it will usually be followed by them in making their decision. Beneficiaries: The trust includes a wide class of potential beneficiaries, known as discretionary beneficiaries. This includes the employee s spouse, children and grandchildren. There is space for adding further discretionary beneficiaries such as a partner. It is also possible for the benefit to be paid to a further trust, such as a bypass trust. If this is required, then the name of the trust should be added to the list of discretionary beneficiaries. The employee is also included as a discretionary beneficiary, to allow the trustees to assign the plan to the employee if he leaves the business. It is not recommended that the employer or a co-shareholder be added as a discretionary beneficiary (unless they are also a spouse or civil partner) as this may compromise the tax benefits of the plan. 13

Your guide to relevant life policies The legislation Relevant life policies were created under the 2006 pension simplification legislation, commonly referred to as A day. The detailed legislation that governs relevant life policies is set out below. A relevant life policy is defined in subsection 393B(4) of the Income Tax (Earnings and Pensions) Act 2003 ( ITEPA ) as: (a) an excepted group life policy as defined in section 480 of the Income Tax (Trading and Other Income) Act 2005, (b) a policy of life insurance, the terms of which provide for the payment of benefits on the death of a single individual, and with respect to which: (i) condition A in section 481 of that Act would be met if paragraph (a) in that condition referred to the death, in any circumstances or except in specified circumstances, of that individual (rather than the death in any circumstances of each of the individuals insured under the policy) and if the condition did not include paragraph (b), and (ii) conditions C and D in that section and conditions A and C in section 482 of that Act are met, or (c) a policy of life insurance that would be within paragraph (a) or (b) but for the fact that it provides for a benefit which is an excluded benefit under or by virtue of paragraph (a), (b) or (d) of subsection (3) of ITEPA s.393b. Therefore the conditions that need to be met if a policy is to be a relevant life policy within the single life category set out in (b) are: Condition A in section 481 of the Income Tax (Trading and Other Income) Act 2005 ( ITTOIA ) that under the terms of the policy a sum or other benefit of a capital nature is payable or arises on the death in any circumstances of [the individual] insured under the policy who dies under an age specified in the policy that does not exceed 75. 14

Condition C in section 481 that the policy does not have, and is not capable of having, on any day: (a) a surrender value that exceeds the proportion of the amount of premiums paid which, on a time apportionment, is referable to the unexpired paid-up period beginning with the day, or (b) if there is no such period, any surrender value. Condition D in section 481 that no sums or other benefits may be paid or conferred under the policy, except as mentioned in condition A or C. Condition A in section 482 of ITTOIA that any sums payable or other benefits arising under the policy must (whether directly or indirectly) be paid to or for, or conferred on, or applied at the direction of: (a) an individual or charity beneficially entitled to them, or (b) a trustee or other person acting in a fiduciary capacity who will secure that the sums or other benefits are paid to or for or conferred on, or applied in favour of, an individual or charity beneficially. Condition C in section 482 that a tax avoidance purpose is not the main purpose, or one of the main purposes, for which a person is at any time: (a) the holder, or one of the holders, of the policy, or (b) the person, or one of the persons, beneficially entitled under the policy. Other relevant legislation The charge to Income Tax and National Insurance on this type of death in service arrangement that previously existed under Part 6 of ITEPA 2003, Chapter 1, was removed by section 247 of the Finance Act 2004. This means that payments by an employer for a non-registered death in service plan on the life of an employee are no longer treated as employment income, where previously the payments would have been taxed as a benefit in kind. As the premiums are not treated as employment income, there will be no charge to Income Tax or National Insurance in respect of the premiums. 15

Your guide to relevant life policies Contact us For more information about relevant life policies and trusts contact your business development manager or a member of our sales team on 0845 300 0005. Alternatively, you can email us at taxtrust.techsupport@scottishprovident.co.uk for help and support on all protection specific taxation and trust related issues. Scottish Provident is a division of the Royal London Group, which consists of The Royal London Mutual Insurance Society Limited and its subsidiaries. The Royal London Mutual Insurance Society Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The firm is on the Financial Services Register, registration number 117672. It provides life assurance and pensions and is a member of the Association of British Insurers and the Association of Financial Mutuals. Registered in England and Wales number 99064. Registered office: 55 Gracechurch Street, London, EC3V 0RL. SCPR5968 SEP15 LD