By Damian Youell, Senior Mortgage Broker and Company Director at NeedingAdvice.co.uk
As an accountant, you work with Ltd company directors, contractors and small business owners who are often juggling multiple financial priorities. One of those priorities should be protecting their family’s finances if something happens to them. Relevant life policies are a straightforward protection tool that fits naturally into your conversations about business structure and tax efficiency. This guide explains what they are, how they work from a tax perspective, and when it makes sense to mention them to your clients.
What is a relevant life policy?
A relevant life policy is a term life insurance policy written in trust for the benefit of someone else, usually a family member. The policyholder (typically the business owner) pays the premiums, but the policy is held in trust so that when they die, the payout goes directly to the beneficiary without forming part of their estate.
The key word here is “relevant”. HMRC uses this term to describe life insurance policies that meet specific conditions. The policy must be written in trust, it must be on the life of the person paying the premiums, and it cannot be connected to a loan or other borrowing. When these conditions are met, the policy qualifies as a relevant life policy for tax purposes.
Why the trust structure matters
Your clients probably already know that anything left in their estate when they die gets caught by inheritance tax at 40% (above the nil rate band). A relevant life policy avoids this because the payout sits outside the estate. The money goes straight to the beneficiary named in the trust.
Estate and inheritance planning is not regulated by the Financial Conduct Authority.
This is not tax avoidance. It is a legitimate use of trust law that HMRC recognises and accepts. The trust is a legal arrangement, not a scheme. Your clients simply need to make sure the policy is set up correctly from the start, which means getting proper legal documentation in place when the policy is written.
The tax treatment explained
From your clients’ perspective, here is how the tax works:
Premiums paid: For limited company directors and employees, qualifying premiums paid by the business are generally treated as an allowable business expense for Corporation Tax, provided they meet the wholly and exclusively test. They do not count as a taxable benefit in kind (P11D) for the employee, nor do they attract National Insurance contributions.
The payout: When the policyholder dies, the beneficiary receives the lump sum. This sum is not subject to income tax. Because the policy is written in trust, it also falls outside the deceased’s estate for inheritance tax purposes. This is the entire point of the structure.
Charges and administration: There are no special tax implications for the trust itself if it is set up correctly as a relevant life policy trust. The trustee simply receives the money and distributes it according to the trust deed.
This simplicity is one reason why relevant life policies are popular with business owners. The tax treatment is clean and straightforward. There are no complicated claims to make or special forms to file. The beneficiary simply receives the money.
When should you raise it with clients?
Relevant life policies fit naturally into several conversations you are already having:
When they mention family dependants: If a client talks about having a mortgage, children in education, or a spouse who depends on their income, that is a prompt to ask whether they have thought about life protection. Many business owners focus so hard on growing the business that they forget to ask what would happen if they were no longer around to run it.
During tax planning discussions: When you are working through their tax position and estate planning, relevant life policies come up naturally. You might be discussing their will, their business succession plan, or how to minimize inheritance tax. A relevant life policy is often part of the answer. (Please note: Estate and inheritance planning is not regulated by the Financial Conduct Authority.)
When they are making good profits: If your client has had a strong year and is looking at ways to use their money wisely, protection is worth mentioning. A modest premium now could make a huge difference to their family later.
When they own a business with a co-owner: Relevant life policies work well alongside business protection arrangements. If two directors own a company equally and one dies, the other might need cash to buy out the deceased’s share or to cover the cost of a replacement. A policy can provide that.
The conversation does not need to be complicated. You might simply say: “Given that you have got dependants and the business relies on you, have you thought about life cover? There is a straightforward way to do it that keeps the payout outside your estate for tax purposes.”
How to refer clients to a financial adviser
Once you have identified that a client might benefit from a relevant life policy, your job is to signpost them to someone qualified to advise them. You are not a financial adviser, and you should not try to be one.
A good referral sounds like this: “I think you should speak to a qualified financial adviser about relevant life cover. They can work out how much cover you need based on your circumstances, explain the options available, and set everything up properly. I can recommend someone if you would like, or you can find one through the Financial Conduct Authority register.”
If you have a regular financial adviser you work with, that referral is straightforward. If not, the FCA register (register.fca.org.uk) is a reliable way for your client to find someone qualified to give advice on insurance and protection products.
The adviser will handle all the technical detail: calculating the right amount of cover, explaining the trust documentation, answering questions about underwriting, and dealing with the insurance company. Your role is to have spotted that it might be relevant and to point your client in the right direction.
What not to do
Do not quote premiums or recommend specific policies. You do not have enough information about your client’s health, age, family situation and financial goals to do this responsibly. Do not suggest that a relevant life policy is definitely the right answer without knowing more. Do not try to set up the trust documentation yourself. Do not promise tax outcomes you cannot guarantee.
Your expertise is in accounting and tax. You know your clients’ financial situation better than anyone. That gives you a good vantage point to spot when life protection is worth discussing. But the actual advice, product selection and implementation needs to come from a qualified financial adviser.
A simple checklist
Before mentioning relevant life policies to a client, ask yourself:
- Does the client have dependants who rely on their income?
- Would their family struggle financially if they died?
- Are they concerned about inheritance tax?
- Do they own a business that depends on them?
If the answer to any of these is yes, it is worth raising the topic. Then refer them to a qualified financial adviser to explore it properly.
Relevant life policies are not complicated, but they do need to be set up correctly. By knowing what they are and when they might help your clients, you can add real value to your relationship with them. You are not selling anything. You are spotting a gap in their financial protection and pointing them towards the right expert to fill it.
• The benefits to the treatment of tax will depend on your individual circumstances and may be subject to change in future.
• Estate and inheritance planning is not regulated by the Financial Conduct Authority.
• This article is for information only and does not constitute financial, legal or tax advice. For advice tailored to your circumstances, speak to an authorized financial adviser.