Business Protection – Taxation

Jan. 20, 2012 - PRLog -- In our first blog this week we looked at the different types of agreements that can be used in connection with Business Protection.  Here, I will cover different tax implications depending upon what the protection is for.

Tax treatment of partnership or shareholder protection
Typically the premiums are paid by the director/business owner, but even if the business pays the premiums they are treated as drawings or directors’ remuneration and the business owner will be taxed as if he or she had paid them and the premiums are not classed as a business expense.  Therefore there is no tax relief on the premiums.  Equally there should be no tax implications on receipt of the monies either.

To comply with the agreements discussed in our last blog the plans should be written in a suitable trust for the other partners or shareholders, there will be no inheritance tax (IHT) implications prior to a claim. Care should be taken if the partners or shareholders are related.

By using the types of arrangements discussed in our last blog in combination with the trust, IHT can be avoided or significantly reduced. There is no tax liability on the proceeds of the plan for the business, as the proceeds do not belong to it.

This can be a complex area and liaison between the financial adviser and business owner’s solicitor can be a wise move.

Tax treatment for key employee cover
This type of cover doesn’t require the same types of agreements in place as the shareholder/partnership protection does.  The main aim of this type of cover is to protect the business in the event of a key employee dying or being off ill.

Premiums paid by a company for cover on key employees may be treated as a business expense, which effectively means that corporation tax relief is available for the company. This treatment is typically available where; the policy is short-term (say for a fixed term of five years or less), the policy is to replace loss of profits or to cover the cost of replacing the employee only, and where the key person’s relationship with the business is employee/employer.

If the company wishes to use this tax treatment, it is recommended that the directors write to their company’s local inspector of taxes to get advice prior to setting up the cover, as all the facts in the particular case will be considered. If this treatment is not available no tax relief is allowed on the premiums.

On a valid claim, if the value is a trading receipt, which is likely to be the case if it is to replace a loss of profits, it will typically be subject to corporation tax. If, on a valid claim, the value is not trading receipt it will typically not be subject to corporation tax.
In February 2008, the Government brought life assurance policies which are company-owned under the ‘loan relationship’ rules. This can be relevant to policies with a surrender value or investment element and means that any increase in value in the company’s accounts of such policies in excess of the premiums paid will be subject to corporation tax each year.

This can be a complex area and liaison between the financial adviser and company’s accountant is recommended.

For further information and tax planning ideas, please do not hesitate to contact us on 028 9066 8700.

Paul Dixon
Chartered Financial Planner

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Census Financial Planning is an independent financial planning practice providing a professional and comprehensive financial planning service, located on the Lisburn Road in Belfast, Northern Ireland.