As I have made clear over the past couple of weeks, the relevant life policy can represent a highly tax-effective and potentially attractive way for an employer to provide life cover for an employee or director.
RLPs can only be effected by employers for their employees. The employer can be a limited company, partnership, LLP or a sole trader. This rules out sole traders, partners or LLP members effecting RLPs on their own lives.
In addition to the usual application form for the RLP, the employer must also complete the appropriate trust documentation. This will normally be furnished in draft by the provider and will typically be in the form of a discretionary trust.
It is reiterated that there must be an employer/ employee relationship. Directors of a company, including shareholding directors, are also treated as employees for this purpose. However, partners, LLP members and sole traders are not employees.
The main benefit provided under an RLP is a lump sum payable on death before the age of 75.
The benefit will be paid by the insurer to the trustees of the trust. The trustees would typically have discretion as to who should receive the benefit from the classes of beneficiaries specified in the trust.
In most cases, payments from an RLP trust by the trustees to beneficiaries should be inheritance tax-free as well as income tax-free
The employee can and should complete a nomination form addressed to the trustees of the trust. This is a non-binding expression of wishes to the trustees. It is similar to the method of nominating beneficiaries under a reg-istered pension scheme. The trustees would normally consider this nomination carefully in deciding to whom the benefits should be paid. However, importantly, they are not legally bound by this “expression of wish”.
The employer will usually be a trustee. The employee can issue a new nomination if they change their mind over who should benefit.
Once the death benefit is paid to the trustees, as the trustees will hold the benefit on discretionary trust then the normal rules, which apply to the taxation of discretionary trusts, will also apply here.
This will mean potential periodic charges and exit charges. As the policy will have no surrender value then unless the life assured is in serious ill health at the time of the periodic charge, there will be no inheritance tax to pay. There will be no exit charge at any time in the first 10 years of the life of the policy and trust. There will only be an exit charge after the first 10 years if there was a periodic charge at the last 10-year anniversary, which there rarely will be, regardless of the level of the sum assured. If there was a periodic charge then an exit within the following 10 years will trigger a charge based on a rate of tax that is an appro-priate proportion of the effective rate charged at the last 10-year anniversary.
It is true to say that, in most cases, payments from an RLP trust by the trustees to bene-ficiaries should be IHT-free as well as income tax-free.
Unlike the old pension term assurance, there is no statutory maximum on contributions or benefits. However, insurers may have their own com-mercial maxima and associated underwriting/ financial underwriting limits.
In summary, the following tax benefits emerge:
- tax relief on the premiums for the employer;
- no assessment of premiums on the employee as a benefit in kind;
- no assessment for the purpose of National Insurance contributions;
- benefits arise free of income tax;
- benefits do not count towards the lifetime allowance for pension purposes; and
- The death benefit will generally be paid free of IHT.
The best way to appreciate the tax-effectiveness of an RLP is by way of example, comparing the net cost of cover through an RLP with the net cost of cover through an ordinary insurance policy funded by the employee out of income that has borne tax and NI.
In the example that follows, the premium payable for the required cover is £5,000 per annum and the following other assumptions are made:
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