In any business there are key people. The ones with the contacts, the expertise in sales, finance or process and those that make “it” happen. With those key people in place the business is successful and has a future – but what happens without them? The absence of that key person through ill health or death poses a huge risk to any business. For a very modest investment that risk can be transferred from the business to an insurer. Risks such as:
- Will the bank call in any loans?
- Will dependents need to withdraw capital?
- Will contacts take their business elsewhere?
- How does the business fund the recruitment of a replacement?
- Who has the specialist knowledge?
- How much profit will be lost in any downtime?
- How long will customers wait?
If a key man is involved in a car crash, the car is covered by law. But is the key man? Yet which is worth more to the business? Keyman insurance puts money into the business should the worst happen.
NB the cost of keyman insurance is often similar to the cost of insuring a car!
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Keyman insurance is a plan effected by an employer on the life of a key employee. In the event of a claim proceeds can be paid as a lump sum or phased over a period.
Whether or not the premiums for Keyman Insurance qualify for tax relief is a common area of discussion. In short there is no definitive answer as the last time the taxation of these policies was discussed in parliament was in 1944. The principles of taxation were set out by the then Chancellor of the Exchequer, Sir John Anderson. He said, ‘
the 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 policy as trading receipts, if:
- The sole relationship is that of employer and employee This means direct employees of the company only – not employees of subsidiaries. As a general rule of thumb if the employee is a director and has a 5% or more holding in the company the policy will not qualify for tax relief. It is still worth asking the inspector of taxes if they are prepared to allow the premiums for a tax deduction.
- The insurance is intended to meet loss of profit resulting from the loss of services of the employee This must be loss of profits arising from loss of the key person. A policy taken out for loan purposes would not qualify as it is for capital purposes rather than loss of profits.
- It is an annual or short term insurance ’ Generally, a short term policy is considered to be 5 years or less. A 5 year renewable policy is usually acceptable. In effect then , it is the local revenue office who will decide whether or not the policy meets the Anderson rules and whether premium relief is allowable. The premiums are charged through the company’s profit and loss account as usual. The company should highlight to the revenue that the premiums have been paid and state whether corporation tax relief has been claimed or not. The inspector of taxes then decides whether to allow the company’s claim for a reduction. One thing to be aware of is that if premium relief isn’t requested or granted, it does not mean that the proceeds of the policy will be tax free.
If you meet the Anderson Rules then the premiums should qualify for tax relief and the claim proceeds will usually be taxable.
Implementing keyman insurance properly involves a fair degree expertise. For advice on ensuring the survival of your business Contact Us