In summary, the rules here seem tolerably clear, albeit the test of purpose being essentially factual.
The essence of deductibility is in the established purpose of effecting the insurance. That purpose (and it must be the sole purpose) must be the meeting of a loss of trading income that may result from the death or illness of the life assured.
Duality of purpose will deny relief. This means that:
It is worth noting that in the case of Greycon Ltd v Klaentschi (HM Inspector of Taxes), heard before the Special Commissioner in 2003 – it was made clear (among other things), that the time to test purpose was at the time the policy is effected. In other words, there is no continuing test of purpose. It is thus essential to have as much documented evidence as possible to corroborate the required purpose at the time the policy is first put into effect.
Although the case law seems exclusively to do with companies, the Business Income Manual does not discriminate between business types. Thus, the rules/principles set out above and in earlier articles would seem to apply to any employer-effected policy. Clearly, any policy effected by a sole trader on himself or by partners on their own lives would have strong duality of purpose and thus not be deductible.
Further reassurance on the test being run at the time the expense is incurred (and for a life policy when the policy is first brought into existence) can be found in BIM 50160 on “Actors and other entertainers’ expenses”. In this section of BIM, HMRC posits the example where: “A film actress may acquire an evening gown solely for the purpose of attending a premiere performance of her latest film. The cost of the gown is allowable. The later private use of the gown, which as a question of fact was bought solely for use at the premiere or such other occasion, does not result in disallowance of the expenditure.”
An analogy can be drawn here with life insurance where if the proven purpose of the policy when it is effected is a revenue purpose and there is no duality whatsoever, the premiums will remain deductible regardless of what the policy proceeds are actually used for.
So that is one side of the “keyperson coin” – deductibility of premiums. What about the other side – assessability of the sum assured? Many consider this to be the most important consideration.
Deductibility is about premiums which can be comparatively small, well at least in comparison with the sum assured which can be huge and potentially taxable all in one year.
It is reassuring to read in BIM 45525 (which has been repeated in many other contexts) that “As a general rule, where a policy does not comply with both of the above conditions (sole purpose and term insurance)
Reassuringly, experience would also seem to bear out that if the premiums are not deductible the sum assured is not assessable.
However, even BIM 45525 states that each case will depend on its own facts.
And that’s what, understandably, causes some financial advisers to become a little nervous. We all like certainty, especially when potentially large amounts are at stake and in most keyperson cases we can be certain. Fortunately, the case law supports this confidence and I will look at this next week.