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If you’re a company director and you have life insurance in place to protect your family, you could be paying more tax than you need to.
There is often confusion around the setting up and establishment of life insurances for Directors and in my experience as many as 90% of the arrangements that I see have not been established properly.
Many accountants are not familiar with the treatment of life insurance and this is of importance since the Finance Act 2006. So we often find that premiums for these vital protection arrangements are deducted as a business expense with no thought as to how the benefits will be taxed.
In addition I have found that the Directors of trading companies and their accountants often under-value the enterprise.
In addition in the majority of arrangements follow a route favoured by the life insurance companies – incorporating a “double option arrangement”.
The Directors wills are often ineffective; these should incorporate “pilot trusts” to take advantage of business property relief.
For succession planning to be effective, this vital but often neglected area of planning should be bespoke.
There has been a recent change in legislation that will allow highly tax efficient arrangements to be organised so that the company can deduct the cost of the life insurance as a legitimate business expense.
In addition the premiums are not classed as a ‘benefit in kind’ so no tax is payable on the premiums. In most cases the benefits are paid free of inheritance tax – provided the benefits are payable through a discretionary trust.
Although the company pays the premiums, they are not normally assessable to income tax on the employee as a benefit in kind. This can be a significant saving, particularly for a higher-rate taxpayer.
This new type of arrangement is suitable for:-
- Company Directors that would like their company to pay for their life cover and offset the premiums against corporation tax
- Small businesses that do not have enough eligible employees to warrant a group life scheme.
- Directors of small limited companies that may be thinking of putting Key Person cover in place so that their company can pay the premiums on their cover
- High-earning employees or directors who have substantial pension funds and do not want their benefits to form part of their lifetime allowance.
- They are not suitable for the self-employed (although their employed staff could be covered).
Do you have a question on any aspect of retirement planning, life insurance or financial planning? Contact one of our Financial Planning Consultants, at Pareto Lawrence we offer both Financial and tax planning advice to corporate and private clients.