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The duallists

I would like to start this article with a look at an important case dealing with the assessability of the proceeds under a keyperson policy. You will know that it is generally accepted that if premiums are not deductible under a keyperson policy, the sum assured will usually not be assessable. One main reason for non-deductibility is duality of purpose, that is, a purpose other than a pure revenue purpose.

In the Greycon case referred to in an earlier article, HM Revenue & Customs tried to assess the proceeds of a keyperson policy on shareholders. The premiums paid under the policy had not been deductible as they failed the wholly and exclusively test.

HMRC in that case argued that the purpose of the policy was to “fill a hole in profits”. Counsel for the taxpayer argued that there was a capital purpose. The case reaffirmed the absolute importance of the facts in each case. The importance, for deductibility and assessability, of the purpose of the policy at the time it was effected (and at no other time) was reaffirmed.

The taxpayer’s argument was successful and the general rule prevailed. That is, where premiums are non-deductible (the absence of sole purpose), the proceeds are non-assessable (as the policy was effected for a capital purpose). It is important to note that the test of purpose was made based on evidence available when the policy was effected. The test was not run based on what the funds were actually used for. How the funds were spent was immaterial.

The case highlighted the willingness, at least at local inspector level, to try to assess policy proceeds even though the premiums paid under the policy had not been deductible.

Against this, we have the apparent robustness in practice of the application of the general rule that if the premiums are not deductible, the sum assured will not be assessable.

The problem, if there is one, seems to stem from a lack of alignment between the clear-cut rule on premiums – the wholly and exclusively test with duality of purpose resulting in non-deductibility – and the rules on assessability of the policy proceeds where the importance of sole purpose and duality is not apparent.

Despite this, it is clear that where the sole purpose of the policy when it is effected is a capital purpose (and given the importance of the purpose test for deductibility at the time the policy is effected with no relevance attached to how the proceeds are actually spent), the sum assured will not be assessable. Having as much documented evidence of purpose and, at the very least, a clear statement of purpose in a board or partners’ minute will be valuable.

If there is to be correspondence with HMRC to clarify the deductibility of premiums to confirm that the premiums are not deductible, it will be worth requesting confirmation on the basis “that the premiums will not be deductible as the sole purpose of the insurance is a capital, not a revenue purpose”. If non-deductibility is confirmed on these grounds, one can be tolerably certain that the sum assured will not be assessable.

So where does this leave us? Well, it seems to me that a possible dilemma could arise if premiums are not deductible because the purpose is part revenue and part capital, thus not fulfilling the wholly and exclusively test because of the duality of purpose test. In that case, arguably, a part of the proceeds (attributable to the capital purpose) will not be assessable and the other part (attributable to the revenue purpose) will be.

This would seem potentially unfair, with non-deductibility of the whole premium but assessability of part of the sum assured.

No mention was made in the Greycon case of what would have happened in regard to non-deductible premiums if the whole sum assured had been assessed.

To sum up, while in most cases the accepted rule will prevail (deductible premiums with an assessable sum assured and non-deductible premiums with a non-assessable sum assured), especially where there is relative certainty that the premiums will not be deductible, it seems to me that it would be worthwhile seeking HMRC’s agreement at outset to the fact that the premiums will not be deductible because the sole purpose of the insurance is a capital, not revenue purpose.

This should not be difficult where:

  • The policy is other than a term policy and/or
  • The life assured is a major shareholder.

    While knowing all this technical detail is essential for any professional adviser, of even greater importance is the implementation of severe proactivity on the part of advisers to get the whole issue of business risk and how to financially (and tax-effectively) provide for it on to the must-do list of their business clients.

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