HMRC rules on relevant life insurance (excepted group life policies)
Relevant life insurance only benefits from its favourable tax treatment if it meets HMRC’s rules. In practice that means the policy has to satisfy a number of specific conditions.
Relevant life insurance works because HMRC treats it as an “excepted group life policy”.
If the policy meets certain conditions — such as being employer-arranged, providing death-only cover, having no surrender value, and ending before age 75 — the premiums can usually qualify for corporation tax relief and are not normally taxed as a benefit-in-kind.
This guide looks at the HMRC rules governing relevant life policies and the conditions that companies and employees must meet for the tax treatment to apply.
What is HMRC’s term for a ‘relevant life’ insurance policy?
“Relevant life insurance” is an industry term used by insurers and advisers. It does not appear directly in primary legislation.
In tax law, a relevant life policy is treated as an excepted group life policy.
The income tax treatment is outlined by HMRC in its Employment Income Manual EIM15045.
The conditions for an excepted group life policy are explained in detail in the Insurance Policyholder Taxation Manual starting at IPTM7020.
The legislative definition appears in the Income Tax (Trading and Other Income) Act 2005 at section 480, with further provisions in sections 481 and 482.
ITEPA 2003 section 393B also provides a statutory definition of a relevant life policy.
HMRC conditions that make a policy “relevant life” in practice
If the conditions are met, a relevant life policy sits outside the employer-financed retirement benefits scheme rules and the premiums are normally not treated as a benefit in kind.
If those conditions are not met, however, and the expense doesn’t qualify, then both the employer and employee may be taxed on the value of the benefit (as a benefit in kind).
1) It must be an employer arrangement
The policy must be taken out by an employer, typically a limited company.
This is why relevant life cover is commonly used by owner-managed companies, including single-director companies where the director is also an employee receiving PAYE income.
For more detail see who can take out a relevant life policy.
2) The policy must provide pure death-in-service cover
An excepted group life policy is designed solely to provide death benefits.
There is a strict definition of permitted benefits in HMRC guidance. You can read these in the IPTM guidance beginning at IPTM7020.
This is why critical illness cover cannot normally be combined with relevant life insurance within the same policy.
Read more in this guide: can you include critical illness cover?.
3) Cover must stop by age 75
A relevant life policy must also specify an age limit for death benefits.
The maximum permitted age is 75. Policies extending beyond that limit would not normally qualify for favourable tax treatment.
This requirement is explained in HMRC guidance here: IPTM7025.
4) The policy must not have a surrender value
Relevant life cover is intended to provide protection rather than act as a financial asset.
For this reason, the policy should not have a meaningful surrender value or investment component.
Policies with investment features or cash-in value could fail the conditions required for excepted group life treatment.
5) Benefits are normally paid through a discretionary trust
Relevant life policies are normally written into a discretionary trust. This arrangement allows the payout to be distributed quickly and may help keep the benefit outside the insured person’s estate.
To understand the mechanics of the trust structure, see trusts and relevant life policies.
HMRC also outlines the inheritance tax treatment of excepted group life policies in the Inheritance Tax Manual at IHTM17091 and IHTM17092.
For a practical explanation see relevant life and inheritance tax.
Why HMRC usually allows tax relief on premiums
HMRC generally treats relevant life cover as an employer-provided death benefit rather than a personal life policy funded by a company.
Where the policy has been arranged correctly, the premiums are usually not treated as a taxable benefit for the insured employee.
The tax treatment is described in HMRC’s Employment Income Manual at EIM15045.
The question of corporation tax deductibility is analysed separately under the wholly and exclusively rules for business expenses.
More detail is explained in is relevant life a legitimate business expense.
To compare this structure with personal policies see relevant life vs personal life insurance.
What if HMRC questions the legitimacy of your policy?
HMRC does not approve individual policies in advance. Instead, the tax treatment depends on whether the policy satisfies the legislative conditions.
If HMRC reviews a policy, scrutiny normally focuses on areas such as:
- Who owns the policy
- Who pays the premiums
- Whether the cover genuinely represents an employer-arranged death benefit
- Whether the policy includes prohibited investment or cash-value features
- Whether the age 75 limit is respected
- Whether the trust has been executed correctly
Many issues arise from paperwork inconsistencies rather than the policy structure itself.
Problems can also occur if a director or employee leaves the company but assumes the cover will continue unchanged. See what happens if you leave your company.
Practical next steps
If you are considering this type of cover, our step-by-step guide explains the process in detail: how to set up relevant life insurance.