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Insuring Your Key People

Taking out insurance on the life and/or health of a person key to your company’s business is often a very sensible precaution.

The premiums for such insurance can be set against the business tax liability if paid by the company, provided the benefit of the policy is received by the company and:

  • the sole relationship between the business and the person insured is that of employer and employee;
  • the person insured owns 5 per cent or less of the company’s shares;
  • the insurance is intended to compensate the business for the loss of profit resulting from the loss of the employee’s contribution to it; and
  • the policy term expires when the employee leaves the business (i.e. it is not a whole-of-life policy).

In such circumstances, the premiums are tax deductible. However, any receipt by the business resulting from a claim under the policy will be taxable.

If the premiums are not deductible for tax purposes, receipts under the policy will not be taxable.

Where the beneficiary under such a policy is the employee, the premium is a benefit in kind.

Pension payments paid to UK insurers are normally tax deductible.

It should also be noted that a company’s right to receive a lump sum from a life assurance policy might make the value of the company greater at the date of death of the life assured, which may have implications for Inheritance Tax purposes.

Always take professional advice when setting up key man insurance and pension schemes.