However, business protection policies are less likely to be impacted by the relevant property regime if the payment of premiums are being made as part of a proper commercial arrangement, as they should not be treated as gifts of lifetime transfers into trust.
Additionally, where there has been a death claim, the proceeds are typically paid directly from the trust to the surviving shareholders, and so it is unlikely that the benefits paid out on claim will be sat within the trust beyond the 10th anniversary.
Where these long-term issues are likely to cause an issue is where the shareholder suffers a critical illness, returns to work and the claim benefits stay in the trust past the tenth anniversary. In these circumstances, the business should take appropriate advice with how to deal with the proceeds from the claim.
5. How does tax relief work in respect of key person plans?
The taxation of business protection premiums is subject to several rules which will differ depending on the type of business and the plan used. There is no legislation about the tax treatment of key person plans, and HMRC will treat each case on its own merits, so it is prudent to ensure that a tax specialist is involved in these conversations.
There are some guidelines that can be followed, often referred to as ‘the Anderson principles’, after former chancellor of the exchequer Sir John Anderson.
For a business to qualify for tax relief on payment of key person plan premiums, according to the Anderson principles, all three of the following tests must be met:
- The relationship must be that of employer/employee. If the life assured has a significant stake in the business (generally regarded as more than 5 per cent) relief could be denied.
- The plan must be intended solely to meet loss of profits arising from the death of the key person.
- Short term assurance – it is generally accepted this means five years.
For sole traders, tax relief will not be due as there is a personal benefit to them or their family. If the business pays the premiums on such a plan, it would normally be treated as drawings from the business. If the person covered is a key employee, the above rules will apply in determining whether the premiums are allowable and the proceeds taxable.
It is important to clarify the tax treatment of the premiums as this can have a bearing on the tax treatment of the proceeds. The general rule is that if the premiums have qualified for tax relief as a business expense, the proceeds will be taxable as a trading receipt.
6. What happens if a claim is paid on a shareholder protection policy where the sum assured is higher than the value of the business?
Even though there is no financial assessment at the time of the claim, HMRC will still need to know certain information on death, such as whether the deceased had shares in a business, received life policy proceeds or transferred any assets, and they would include the value of the shares in their calculations, they would also require the valuation of the company.
