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Bonus of contention

Last week, I started to look at the income tax and National Insurance implications when a company effects a policy of life insurance on the life of an employee or director and, sometime later, decides to assign that policy to the employee or director.

This is perhaps a relatively infrequently encountered scenario but is not one that never occurs and is certainly one where there appears to have been some relatively long-standing uncertainty and misunderstanding.

The policy in question would be one established to provide pure protection for the company during the working life of the life assured or, perhaps less likely, to provide investment or even a mixture of the two.

Having said that, some time ago, National Insurance avoidance was the objective when a company effected (usually) a single-premium life insurance policy (bond) and then assigned the policy as a non-cash benefit to the employee as a bonus alternative that was free of National Insurance contributions.

Specific anti-avoidance regulations were introduced to prevent this perceived abuse applying (among other occasions) where there was the conferment of a beneficial interest in a policy of life insurance. Subsequent variations on the National Insurance avoidance theme with life policies included the effecting of a (usually single-premium) policy by an employee or director for his or her own benefit – usually for a relatively small sum – with the subsequent payment of a substantial top-up premium by the employer.

In this way, it was argued, the employer avoided the conferment of a beneficial interest within the anti-avoidance regulations. It is understood that it is the Inland Revenue view, however, that this constitutes a benefit subject to tax and National Insurance contributions under the PAYE system as the benefit conferred by the employer is cash as this is the form in which the payment for the policy is made by the employer.

This position seems to have been further clarified through section 66 of the Finance Act 1998, which provides that PAYE applies when assets are enhanced by expenditure made by the employer.

Be all of that as it may, we had occasion recently to seek the guidance of the Inland Revenue on the value that is taken into account for tax (and National Insurance) purposes when a company assigns a policy of life insurance (protection or investment) to an employee or director. I will discuss the case further next week.


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