A relevant life plan is an employer-arranged life policy that can provide death-in-service style cover for an individual employee. It is often used by smaller companies where cover is needed for a director or another employee, but it is not simply a personal life insurance policy paid for by the company. The tax treatment depends on how the policy is structured, who can benefit from it, and whether it is genuinely being provided as an employee benefit.
This article explains what a relevant life plan is, how it normally works, and the main UK tax points for both the employer and the employee. It also highlights the common situations where the expected tax treatment may not apply.
What Is a Relevant Life Plan in the ?
Relevant life plans are often used where a company wants to provide death-in-service style cover for a particular employee without putting in place a group life arrangement for a wider employee group. That can make them especially useful for smaller businesses, owner-managed companies and family companies, where the employer may want to cover a director or another employee on an individual basis rather than through a broader scheme.
They can also be attractive where the company wants to pay for the cover itself instead of increasing salary and leaving the employee to arrange personal life insurance from net income. That can work well in practice, but the tax position still depends on the facts. In particular, the company should be able to show that the premium is being paid as part of a genuine employment package for business purposes, rather than as private family cover paid through the company. HMRC’s approach is not automatic and becomes more difficult where there is a personal motive or the overall package looks excessive for the role.
Another practical point is that, when structured properly, a relevant life plan sits outside the registered pension scheme regime. In other words, it is not simply another registered pension death benefit. Instead, it has its own statutory conditions, including rules on who can benefit and the type of policy that can qualify.
How the UK Relevant Life Plan Usually Works in Practice
In a typical relevant life plan, the employer puts the cover in place and pays the premiums. The employee is the person whose life is insured. The insurance company provides the policy and pays the claim if the policy terms are met.
If the employee dies while the cover is in force and the claim is accepted, the insurance company will usually pay the lump sum to the trustees. The trustees then distribute the money to the beneficiaries in line with the trust terms and any nomination the employee has made. The company is not intended to receive the pay-out.
There are therefore usually five parties involved: the employer, the employee, the insurance company, the trustees and the beneficiaries.
This is why a relevant life plan should not be confused with business protection cover. Business protection is designed to benefit the business or its owners. A relevant life plan is designed to provide a personal death benefit for the employee’s intended beneficiaries.
Main Tax Position for the Company and for the Employee
From the company’s point of view, there are usually two main tax questions.
The first is whether paying the premium creates a taxable benefit for the employee. Where a relevant life plan is structured as a qualifying relevant life policy, the death benefit element can usually fall outside the normal benefits code. That is one reason these plans are often used by smaller companies. However, that treatment should not be assumed just because the policy is described as life cover. The detail still matters. Problems are more likely where the policy includes non-qualifying features, where the company or its owners could benefit from the payout, or where the arrangement looks more like private cover being paid through the business than a genuine employee benefit.
The second is whether the company can deduct the premium for Corporation Tax. This is a question of fact and degree, not an automatic relief. In many straightforward cases, the premium can be deductible where the cover forms part of a genuine remuneration package and the cost is incurred wholly and exclusively for the purposes of the trade. HMRC’s focus is on the overall package, not just the premium on its own. A challenge is more likely where there is a personal or non-business motive, where the level of cover appears excessive for the role, or where the arrangement is being used in a way that suggests tax planning rather than ordinary commercial reward. That can be especially relevant in owner-managed and single-director companies, where the business should keep a clear record of why the cover was provided and how the level of cover was decided.
Inheritance Tax: What the Trust Means in Practice (And the Two Charges People Miss)
A key reason relevant life plans are usually written into trust is that, if the arrangement is set up properly, the death benefit can usually be paid outside the employee’s personal estate. In practice, the policy is often held in a discretionary trust, with the insurance proceeds paid to the trustees and then distributed to the intended beneficiaries under the trust terms. HMRC also recognises that relevant life policies are often held through a discretionary trust.
That does not mean the trust is ignored for Inheritance Tax. A discretionary trust is usually within the relevant property regime, which means there can be 10-year anniversary charges and exit charges. In many straightforward relevant life cases, those charges may still be nil in practice, but it is worth understanding why. HMRC says most property held in trust is relevant property, that a 10-year charge can arise if relevant property above the threshold is held at the anniversary date, and that exit charges can apply when relevant property leaves the trust.
A common misunderstanding is that premiums paid into a relevant life plan create a growing cash fund inside the trust. Usually they do not. In a typical term assurance arrangement, the trust holds the policy itself rather than an accumulating pot of money. HMRC says a term assurance policy will not have a surrender value, although it may still have an open market value. So, while the employee is alive, there is often little or no practical value in the trust unless and until a claim is paid.
1) The “ten-year anniversary” charge
2) The “exit” charge when money leaves the trust
The practical takeaway
The Conditions the Relevant Life Policy Needs to Satisfy
A relevant life plan is not just any life policy paid for by an employer. The legislation links the definition to the rules for excepted group life policies, adapted for a single life. In broad terms, the policy needs to stay within a fairly narrow framework.
The main conditions are usually as follows:
- The benefit must be a death benefit on the life of a single individual
- The policy must only pay on death before a specified age, and that age cannot be more than 75
- It should not build up a surrender value. If the policy is cancelled, there should usually be no surrender value, apart from a possible refund of premiums in limited circumstances.
- The payout must be set up for individuals or charities, not for the company. This can be done directly, but it is often done through a trust where trustees receive the money and pass it on.
- The arrangement must be set up for genuine protection, not mainly to get a tax advantage.
That is why a policy with an investment element, a real cash value, or the wrong beneficiary structure can cause problems. It is also why additional features need to be checked carefully. Some add-ons may be fine, but you should not assume that every added feature keeps the plan within the relevant life rules.
When the Relevant Life Plan Expected Tax Treatment Can Go Wrong
The most common problem areas are practical rather than theoretical in relevant life plan.
Salary sacrifices and cash alternatives
This is one of the main watch points. If the employee gives up salary or bonus in return for the cover, or can choose cash instead of the benefit, the arrangement may fall within HMRC’s optional remuneration arrangement rules. In that case, the tax result can change significantly. HMRC says death benefits are not protected under these rules in the same way as retirement benefits, so the usual exemption under section 307 ITEPA 2003 may no longer help. In broad terms, the employee can then be taxed on the higher of the cash given up and the normal taxable value of the benefit. If that happens, the employer may need to report the benefit to HMRC and may also have to pay extra employer National Insurance. In practice, that is often dealt with through payroll or through the P11D process.
The company can benefit from the proceeds
A relevant life plan is meant to support the employee’s family or other permitted beneficiaries. If the business can receive the pay-out, directly or indirectly, the arrangement starts to look more like business protection than an employee benefit. HMRC says a relevant life policy is excluded from the EFRBS charge only if it meets the statutory conditions, and those conditions are built around benefits for individuals or charities rather than the employer.
The cover level is hard to justify
A high level of cover is not automatically wrong, but it does increase risk in owner-managed companies. HMRC’s approach to Corporation Tax relief focuses on whether the overall remuneration package is incurred wholly and exclusively for the purposes of the trade, and HMRC may challenge cases where the package looks excessive for the work done or has a personal motive.
The trust and policy paperwork do not match
These plans rely on the legal documents doing what everyone thinks they do. If the trust is not completed correctly, trustee details are wrong, or the beneficiary position is unclear, the arrangement becomes much harder to support and can create delays or disputes when a claim is made. The tax outcome depends on the policy and trust actually matching the intended structure.
The policy includes the wrong type of benefit
A plan designed as straightforward death cover becomes harder to analyse if it also includes non-qualifying elements. HMRC says that where part of a life assurance policy qualifies for section 307 and part does not, the exemption only works if the qualifying part and its cost can be identified separately. If they cannot be separated, the mixed cost is not covered by the exemption.
What Happens to Relevant Life Plan if the Employee Leaves or Retires
- A relevant life plan is usually set up as an employee benefit, so it should be reviewed whenever employment changes.
- If the employee leaves the company, the most common outcome is that the company stops paying the premiums and the cover ends. The employee may then decide whether to arrange personal cover separately. In some cases, a policy may be capable of being continued, assigned or replaced, but that should never be treated as automatic. Any change in who owns the policy, who pays for it or who is entitled to the benefit can affect both the practical position and the tax analysis. HMRC’s guidance also distinguishes between assignments for money or money’s worth and assignments that are not, so this is an area that needs checking rather than assumption.
- A review is also sensible as the insured person approaches the policy end age. Relevant life cover is normally designed to end before age 75, so it is not intended to continue indefinitely into later life. If cover is still needed after that point, a different arrangement may be required.
- Any change in employment status is a good time to review three things together:
- whether the cover should continue, stop or be replaced
- whether the trust still directs the benefit to the right people
- whether the tax position still looks as expected
Practical checks before putting a Relevant Life Plan in place
In practice, many problems can be avoided by checking a short list before the policy goes live:
Summary
A relevant life plan can be a practical way for a company to provide death-in-service style cover for an individual employee, often a director, but only if the structure is right. The expected tax treatment does not come from the product label alone. It depends on the policy meeting the statutory relevant life conditions and being used as a genuine employee benefit rather than as business protection or private cover routed through the company.
This article is intended as general information only and does not constitute tax, legal or financial advice. The tax treatment of relevant life plans depends on individual circumstances. You should take professional advice before putting a plan in place or relying on any of the points discussed above.
Do you have more queries?
We, at UK Property Accountants have helped a lot of clients deal with Relevant Life Plan in an efficient way. If you have any queries on tax enquiries or need some advice from us.
