Our previous blogs have pointed out that in our experience as many as 90% of business owners have inappropriate business protection arrangements. In addition we have stated that it is possible in many instances to arrange life insurance so that the business obtains tax deduction and the business owners family gets the proceeds tax free.
If you haven’t taken advantage of this new style arrangements – what are the tax implications.
Taxation of claims
If tax relief on premiums is allowed, then the policy proceeds will normally be taxed as a trading receipt and subject to corporation tax for companies and income tax for partners (based on their respective shares of partnership profit).
Where tax relief on premiums is disallowed, the proceeds will usually be treated as a capital receipt taxed under Chapter ll Part Xlll of the 1988 Income and Corporation Taxes Act, whenever a “chargeable event” arises.
A chargeable event may occur on death but not on a critical illness claim. A tax liability will arise if the policy is showing a “chargeable gain” – calculated as the surrender value of the policy immediately before death less premiums paid to date. Any positive surplus is added to company or partnership profit and taxed accordingly. It must be said that it is highly unlikely that the surrender value of the policy will ever exceed premiums paid.
The proceeds of a term assurance policy in this context would not be taxed, because term assurance policies never acquire surrender values.
Not claiming premium relief
A company or firm may choose not to claim tax relief in order to avoid taxation of the proceeds as a trading receipt. However, a decision on the decision on the tax treatment of the premiums may initially be ruled upon with the local inspector of taxes who can rule them tax-deductible, even when no claim for premium tax relief has been made.
Although some say that it may advisable to establish the tax treatment of the policy before it is put in force by placing the facts before the local tax inspector. However we believe that this is not a reliable stance as ultimately it would be decided by a tax tribunal.
Our advice :
- Review your business protection arrangements at least every two years.
- Ensure your partnership protection or shareholder protection is carefully considered (check out our book on this subject).
- If your arrangements fall outside of the new style of policy then consider applying for Non-Statutory business clearance for part or all of the arrangements.
If you have any queries on business protection you can always discuss your problem with one of our Financial Planning Consultants, at Pareto Lawrence we offer Financial and tax planning advice to corporate and private clients.