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Relevant questions

In my second look at relevant life policies, I look at the benefits of RLPs and who they might be suitable for

Last week I introduced a review of the benefits that a relevant life policy can deliver to both employer and the “covered” employee or director.

The tax-efficiency of an RLP is undeniable and I will look at this in more detail below. The “qualifying” rules are quite simple.

The key relevant conditions to be met for a policy to be an RLP within the single life category are:

  • Under the terms of the policy, a capital sum is payable or arises on the death in any circumstances of the insured person under the age of 75
  • The policy does not have and is not capable of acquiring a surrender value
  • No sums or other benefits may be paid under the policy except those prescribed and
  • Any sums payable or other benefits arising under the policy must be paid to or for, or conferred on, or applied at the direction of:

a: an individual or charity beneficially entitled to them or
b: a trustee or other person acting in a fiduciary capacity who will secure that the sums or other benefits are paid to or for or conferred on or applied in favour of an individual or charity beneficially.

Section 393B(4)(c) ITEPA 2003 provides that apart from a death benefit, other benefits that can be provided under an RLP are an ill-health or disablement benefit for an employee during employment and a death by accident benefit, also during employment.

There is an additional and potentially very important condition in section 482 ITTOIA 2005 to consider which states that a tax-avoidance purpose must not be the main purpose or one of the main purposes for the policyholder (the employer) or any person beneficially entitled under the policy. The extent to which this provision will or could be applied has yet to be determined but it is important to keep it in mind.

The benefits of an RLP are impressive. Just consider the following:

  • The death benefit will not form part of the employee’s pension lifetime allowance
  • Premiums paid by the employer will generally be treated as a business expense for tax purposes.
  • Premiums paid by the employer are not treated as a bene-fit in kind for the member (life insured)
  • The premiums paid also do not form part of the employee’s annual allowance, that is, the amount that can be contributed by or on behalf of an individual to any registered pension scheme with the benefit of tax relief.
  • Premiums are not assessable on the employer or employee for National Insurance contributions purposes
  • The benefits arise free of income tax
  • While the death benefit is payable through a discret-ionary trust generally it will be paid free of inheritance tax and will not form part of the employee’s estate for inherit-ance tax purposes.

So, given these conditions and the tax benefits of an RLP, who is it suitable for? An RLP is suitable for those employers who, perhaps because of the smaller size of their business, do not wish to set up group arrangements for all their employees or wish to provide additional benefits to individual employees. And, subject to the arrangement not being seen as having a tax-avoidance motive, also for officers of the company, including directors.

Self-evidently, an RLP will not be suitable if the life to be insured is not an employee. This means that an RLP will not be permissible for a sole trader, partner or member of an LLP on their own life – no employer/employee relationship exists.

An RLP will also be unsuitable if it is intended to provide benefits beyond age 75 and/or beyond the period of employment. An intention to provide benefits other than just a death benefit and benefits on ill-health, disability and death by accident will also mean that an RLP is unsuitable.

If the policy does not satisfy the conditions for an RLP, it will be taxed as an employer-financed retirement benefits scheme. In practice, an RLP will be marketed and made available in “qualifying” format and so provided, as a matter of fact in any particular case, the relevant conditions are satisfied, there should be no question over the policy qualifying for RLP status. Providers offering the contract would also provide a suitable draft trust.

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