What is the tax position of a key person policy? Surprisingly, the only guidelines on the tax treatment of a key person policy were set out back in 1944 by then-Chancellor of the Exchequer, Sir John Anderson, who stated: ‘Treatment for taxation purposes would depend upon the facts of the particular case, and it rests with the assessing authorities and the Commissioners on appeal if necessary to determine the liability by reference to these facts. I am, however, advised that the general practice in dealing with insurances by employers on the lives of employees is to treat the premiums as admissible deductions, and any sums received under a plan as trading receipts if: ■ the sole relationship is that of employer and employee - ■ the insurance is intended to meet loss of profi t resulting from the loss of services of the employee, and ■ it’s an annual or short-term insurance’
To explain those points further – in the fi rst instance, if the individual in question holds a substantial interest in the business, tax relief is typically not permitted. Any ownership exceeding 5% may be regarded as signifi cant in respect to key person protection. T e rationale behind this criterion is that for expenses to qualify for tax relief, they must be ‘wholly and exclusively for the purpose of trade’. Tax relief will not be accessible if the individual is a sole trader, as there is evidently a personal advantage for them or their family. Should the business cover the premiums on such a policy, it would generally be classifi ed as drawings from the business. Regarding the second point, the plan must be designed exclusively
to address profi t loss resulting from the death of the key individual. Any plan that includes a surrender value will not be eligible for tax relief because it does not meet the criterion of being wholly and exclusively for business purposes due to its investment component. T e amount of coverage must also be deemed reasonable, which is typically evaluated during the fi nancial underwriting process. And thirdly, while there is no precise defi nition for short-term
assurance, it is commonly understood to refer to a duration of fi ve years, or potentially up to ten years at most. Five-year renewable insurance is generally considered acceptable, as it allows for continuation of the cover at the end of the term without any medical evaluation, making it a frequently recommended option by fi nancial advisers.
What about any proceeds paid out under the plan? T e tax treatment of the premiums can infl uence the tax chargeable on the proceeds. If the premiums qualify for tax relief as a business expense, the proceeds are typically taxable as a trading receipt. T e tax situation becomes somewhat more intricate and complex if you are in a partnership, and it is advisable to consult your tax account- ant regarding this matter. Our fi nancial planners understand that when you are running
a business, there are multiple issues competing for your attention at any given time, which is why robust fi nancial planning is key to protecting yourself and your business.
MHA Wealth is the trading name of MHA Wealth Ltd, a company registered in England (1916615) with registered offi ce at The Pinnacle, 150 Midsummer Boulevard, Milton Keynes, MK9 1LZ. MHA Wealth is authorised and regulated by the Financial Conduct Authority (FCA) with registered number 143715 and is a member of the London Stock Exchange. MHA Wealth is a member of the MHA group. Further information on the MHA group can be found at
www.mha.co.uk/details-of-mha-uk-entities This communication is for general information only, is a marketing communication, and is not intended to be individual investment advice, a recommendation, tax, or legal advice. The views expressed in this article are those of MHA Wealth or its staff and should not be considered as advice or a recommendation to buy, sell or hold a particular investment or product. In particular, the information provided will not address your personal circumstances, objectives, and attitude towards risk.
The application of these principles will vary based on the specifi cs of your objectives and personal circumstances, we therefore suggest that the business or their accountant contact the local tax inspector when establishing the plans to verify your tax treatment.
For guidance with any of the topics raised in this article, contact our wealth and fi nancial planning team at
www.mha.co.uk/services/wealth
This information represents our understanding at the time of publication of current law and HM Revenue & Customs practice. Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change. You are therefore recommended to seek professional regulated advice before taking any action. Key Risks: Capital at risk. Past performance is not a guide to future performance. The value of an investment and the income generated from it can go down as well as up, and is not guaranteed, therefore you may not get back the amount originally invested. Investment markets and conditions can change rapidly. Investments should always be considered long-term.
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FINANCE
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