Relevant life policies are primarily aimed at three groups:
- High-earning employees who have substantial pension funds;
- Small businesses without enough eligible employees to warrant a group life scheme; and
- Company directors.
Provided the arrangement meets certain criteria, a relevant life policy has a number of advantages:
- Benefits won’t form part of the employee’s lifetime pension allowance;
- Premiums paid won’t form part of the employee’s annual allowance; and
- Premiums paid by employers are not normally assessable for employer or employee National Insurance contributions.
A terminal illness benefit is available on most contracts, so in the event of the employee being diagnosed as suffering from a terminal illness, i.e. one where the expectation of life is less than twelve months, the sum assured under the contract will become payable.
Such policies must only provide for a lump sum death benefit payable before the age of 75 and no other benefit must be conferred under the policy. It must not be capable of having a surrender value other than in very limited circumstances, and any benefit must only be payable to an individual, or a charity, and not for the use of tax avoidance.
Premiums paid by employers are not normally assessable on the employees as a benefit in kind, meaning they are not subject to income tax. They may be treated as an allowable expense for the employer in calculating their tax liability provided that they satisfy qualification under the ‘wholly and exclusively’ rules. Also, as the benefits are payable through a discretionary trust, in most cases the benefits are paid free of inheritance tax.
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