HMRC rules on relevant life insurance (excepted group life policies)
Relevant life insurance derives its tax advantages from narrow HMRC rules. It’s not ambiguous, and there are specific conditions you must satisfy.
In this guide, we examine the rules governing relevant life policies and outline the conditions that must be met for a company and its employees to benefit from them.
What is HMRC’s term for a ‘relevant life’ insurance policy?
“Relevant life insurance” is a term used in the insurance industry, but doesn’t appear in any legislation.
In fact, a relevant life policy is treated as an excepted group life policy.
HMRC outlines the income tax treatment in the Employment Income Manual at EIM15045.
In HMRC’s Insurance Policyholder Taxation Manual, starting at IPTM7020, you’ll find the “excepted group life policy” conditions explained in detail.
If you want to explore the legal definitions further, the “excepted group life policy” definition is contained in the Income Tax (Trading and Other Income) Act 2005 at section 480, with detailed conditions in section 481 and section 482.
There’s also a specific definition of “relevant life policy” in ITEPA 2003 at ITEPA 2003 section 393B (particularly subsection (4)), which is commonly referenced by providers and advisers when describing what qualifies.
HMRC conditions that make a policy “relevant life” in practice
The tax treatment of relevant life is pretty straightforward: if the conditions are met, the policy can sit outside the employer-financed retirement benefits scheme rules, and the premiums aren’t usually taxed as a Benefit-in-Kind.
However, if these specific conditions aren’t met, the tax treatment is likely to change, and both the employer (a limited company) and the employee may be subject to Benefit-in-Kind taxes.
1) It must be an employer arrangement
The policy can only be taken out by an employer (i.e. a limited company).
This is why relevant life cover is a popular arrangement for limited companies, including single-director companies where the director is also an employee (i.e. paid a salary via PAYE).
For more information on who qualifies, read who can take out a relevant life policy?
2) The policy has to be pure death-in-service cover
An excepted group life policy is designed to provide death benefits.
The permitted benefits are tightly controlled. HMRC’s “group life policies” guidance is in the IPTM series, and the allowed benefits are discussed across the pages linked from IPTM7020.
This is why critical illness cover can’t be combined with relevant life insurance in the same way.
Read more here: Can you include critical illness cover?
3) Cover must stop by age 75
There is a statutory age limit for a relevant life policy to qualify for favourable tax treatment under HMRC rules.
HMRC is explicit that the policy must specify an age limit for death benefits, and it can’t exceed 75. See IPTM7025.
4) The policy must not have a surrender value
Relevant life cover is intended to provide protection, not to be an ‘asset’ with a cash-in value.
A policy that can be cashed in or surrendered for some kind of value risks failing the “excepted” conditions.
In practice, this is why relevant life policies are written without investment features and without meaningful cash value, aside from limited refunds of unused premiums in some structures (where permitted by the conditions).
5) Benefits should be paid via a discretionary trust
Relevant life policies are normally written into a trust. The trust is a key factor in how quickly the benefit is paid and, in many cases, whether it can sit outside the insured person’s estate.
For the mechanics of how discretionary trusts work, see our guide to trusts and relevant life policies.
HMRC also outlines the inheritance tax treatment of excepted group life policies in its Inheritance Tax Manual.
You can find out more in IHTM17091 and IHTM17092.
Also read our guide to how the trust is treated for IHT purposes.
Why HMRC usually allows tax relief on premiums
HMRC’s view is that a relevant life policy is an employer-provided death benefit, not a personal policy funded by a company.
When a relevant life policy has been set up correctly, company-funded premiums aren’t normally treated as a taxable Benefit in Kind for the employee. HMRC describes the tax treatment at EIM15045.
The question of Corporation Tax deductibility is separate. It is usually analysed under the wholly and exclusively rules, subject to the standard treatment of business expenses.
Read more here: Is relevant life a legitimate business expense?
To compare the different tax treatment of life insurance premiums, read this guide: Relevant life vs personal life insurance.
What if HMRC questions the legitimacy of your policy?
HMRC doesn’t “approve” individual policies before they are underwritten; they will look into their structure if any abnormalities or questions arise in the future.
Following on from the previous section on conditions, HMRC scrutiny is likely to focus on a few specific areas:
- Who owns the policy.
- Who pays the premiums.
- Whether the cover is genuinely an employer-arranged death benefit.
- Whether the policy includes prohibited benefits or cash value features.
- Whether the age 75 limit has been exceeded.
- Whether the trust is executed correctly and administered sensibly.
Unsurprisingly, many problems arise from inconsistencies in paperwork.
Examples include: trust deeds that have never been properly executed, or where an employee has left the company on the assumption that the cover can continue unchanged.
We cover the second scenario here: What happens if you leave your company?
Practical next steps
As an initial starting point, read our step-by-step guide: How to set up relevant life insurance.