In addition to useful case studies, many providers such as Aegon and Zurich provide useful information aboout how the rules work in practice.
Zurich's adviser business protection hub also provides several documents and frequently-asked questions, as well as a breakdown of the tax position of key person assurance.
It states: “One key question is whether the business will obtain any tax relief on the payments it makes to the plan.
“Obtaining this can be an important consideration, although if a payment is deductible, the sum assured is likely to be taxable."
But not every key person plan will benefit from this relief.
Broad guidelines from HM Revenue & Customs:
The sole relationship between the insuring party and the key person must be that of employee and employer.
The plan must be intended to compensate for loss of profits. If, for example, it has been taken out to also repay a loan, it is unlikely the payments will get tax relief.
The plan must be a short-term or annual insurance. HMRC will generally regard a term assurance plan as short-term if it has a term of five years or less.
Basic example: How tax is calculated if the sum assured is taxable. Source: Zurich
1. If the plan pays out £100,000, this is added to the employer’s profits for the tax year in which it is received, and calculated as if this were part of the profits.
2. The impact on the tax liability for the year will depend on the extent to which the profits of the company have been diminished by the loss of the key person.
3. A company could arrange for the sum assured to be paid in installments, so only the amount received in a year will be subject to tax in that year.
4. Tax relief on payments is balanced by the tax on the proceeds. For example: If the payment is £100 and the sum assured is £10,000, a company paying tax at the small companies’ rate of 20 per cent (unchanged since 2014 - see the table below), the firm will effectively pay £80 after tax relief and receive £8,000 in proceeds after tax.
5. In order to insure a larger sum, a larger payment will usually be necessary.
This is, of course, a simple example and there are many nuances – not least the potential threat of corporate tax changes in future Budgets.
Therefore, any advisers or clients considering business protection to help ensure the smooth running of the firm and continuity of business, should also consider seeking specialist tax advice.
Corporation Tax bands as at 2017 (Source: HMRC)
| 2017 | 2016 | 2015 | 2014 | |
| Small profits rate (companies with profits under £300,000) | - | - | - | 20% |
| Main rate (companies with profits over £300,000) | - | - | - | 21% |
| Main rate (all profits except ring fence profits) | 19% | 20% | 20% | - |
| Marginal Relief lower limit | - | - | - | £300,000 |
| Marginal Relief upper limit | - | - | - | £1,500,000 |
| Standard fraction | - | - | - | 1/400 |
| Special rate for unit trusts and open-ended investment companies | 20% | 20% | 20% | 20% |
Expenses of not insuring
As pointed out in previous articles to this guide, the risks of not insuring can turn out to be far more expensive in the long run.
