Whether or not the premiums for Keyman Insurance qualify for tax relief is a common area of discussion.  In short there is no definitive answer as the last time the taxation of these policies was discussed in parliament was in 1944.  The principles of taxation were set out by the then Chancellor of the Exchequer, Sir John Anderson. 

He said, ‘the treatment for taxation purposes would depend upon the facts of the particular case and it rests with the assessing authorities and the commissioners on appeal if necessary to determine the liability by reference to these facts.  I am, however, advised that the general practice in dealing with insurances by employers on the lives of employees is to treat the premiums as admissible deductions, and any sums received under a policy as  trading receipts, if:

1.     The sole relationship is that of employer and employee

This means direct employees of the company only - not employees of subsidiaries.  As a general rule of thumb if the employee is a director and has a 5% or more holding in the company the policy will not qualify for tax relief.  It is still worth asking the inspector of taxes if they are prepared to allow the premiums  for a tax deduction.

2.     The insurance is intended to meet loss of profit resulting from the loss of services of the employee

This must be loss of profits arising from loss of the key person.  A policy taken out for loan purposes would not qualify as it is for capital purposes rather than loss of profits.

3.      It is an annual or short term insurance ’

Generally, a short term policy is considered to be 5 years or less.  A 5 year renewable policy is usually acceptable.

In effect then , it is the local revenue office who will decide whether or not the policy meets the Anderson rules and whether premium relief is allowable. 

The premiums are charged through the company’s profit and loss account as usual.  The company should highlight to the revenue that the premiums have been paid and state whether corporation tax relief has been claimed or not.  The inspector of taxes then decides whether to allow the company’s claim for a reduction.

One thing to be aware of is that if premium relief isn’t requested or granted, it does not mean that the proceeds of the policy will be tax free.  If you meet the Anderson Rules then the premiums should qualify for tax relief and the claim proceeds will usually be taxable.

To say that Keyman Insurance is overlooked by most UK companies is a serious understatement. 

For those of you reading this article who do not know what Keyman Insurance is, here’s a brief explanation.  Keyman Insurance is a life assurance policy taken out by a company covering an employee/s sudden absence from the business due to death or illness. 

Over 90% of companies in the UK have 10 or less employees so at least one of these people is bound to be a key employee.  That is, the employee is key to the companies ongoing survival.  He or she could be a top salesperson, an IT professional who looks after the company website, a Director or just about anyone who strives to make the company the success it is today.  So now try to imagine what it would be like if that person/s were to die suddenly or be diagnosed with a critical illness.  What would happen to the company?  Maybe:-

• There would be a drop in sales immediately which would lead to a drop in profits
• You may need to hire expert help on a temporary basis which would cost considerably
• The company probably wouldn’t run as well
• There would be a significant amount of stress placed on other members of the workforce
• Company confidence would be damaged

Clearly losing a key person is not something any company would want to go through but it is one contributing factor that can cause companies to collapse.

By having Keyman Insurance in place the company could survive the financial loss of a key individual.  The money from the policy could be used to provide compensation for the loss in profits as a result of the keymans’ death or illness.  This would allow the company time to train another employee to take over or recruit a new suitably qualified applicant.

There are many examples and case studies on the Internet as to what would happen if your business did not have Keyman Insurance but the best example would be your own if you were to let it happen.  To put things into perspective, 1 in 5 men will suffer a critical illness before retirement age.  If your business employs 10 people then there’s a 20% chance it could effect the running of the business.

Does Keyman Insurance have any place in your business?  If you would like to talk further about Keyman Insurance and its benefits to your company please either complete the contact form or call us on 0870 080 2343.

Most companies, whether they are small or large, are struggling right now.  Obtaining credit from banks is becoming harder by the day.  Sales are down and costs are rising.  What can the company do to survive?  Put simply, companies have to cut costs which often means staff too.  More and more redundancies are announced each day but it is extremely unlikely that any of these redunancies are key persons. 

There can be a problem with this approach though.  Often enough companies also try to cut as many costs as possible including insurance premiums such as keyman insurance.  This can be dangerous to the company in a recession though.  If the company has already made some staff redundant and kept on essential staff, but one or more of those are keyman category and suffer death or are diagnosed with a critical illness, where does this leave the company?  If the company has had the sense to have keyman insurance in place then at least the insurance policy proceeds will provide the company with some funding to carry on trading and find a suitable replacement.  If, however, no keyman  insurance is in place then the company faces a very realistic possibility of closure. 

A keyman or key person is someone within the company who adds real value to its existence.  These key people often have the most contacts, sell the most, and are passionate about the company’s future.  Without them the company might not be.  Every company or business will have someone who is key to its continued success but without them the company or business would not survive.  Surely these people are worth insuring?  There is an argument that these people should be insured now, in a recession, more than any other time simply because they are the people who will get the company through the recession and ensure continued success whilst competitors fall be the wayside.

To sum up, Keyman Insurance has more relevancy now than ever before.  Think about those people in your company who make it what it is and will continue to be.