A relevant life policy works differently for a limited company director than a personal life insurance policy does. The company pays, the tax treatment is different, and the benefit is held in trust rather than forming part of your estate. This worked example walks through how the arrangement fits together for a typical director.
The example below deliberately avoids quoting premiums. Premiums depend entirely on age, health, occupation, smoker status, the level and term of cover, and each insurer’s underwriting. Any figure quoted in an article would be meaningless for your own situation.
The Scenario
James is 42, a non-smoker, and the sole director of his own limited company. He takes a mix of salary and dividends. He has a wife, two children, a mortgage and some business borrowing. He wants a substantial level of life cover in place, and he has heard that arranging it through the company may be more efficient than paying for it personally.
James has no group life scheme, his company is too small for one. So the practical choice is between a personal life policy paid from his own post-tax income, and a relevant life policy paid by the company.
How a Relevant Life Policy Works for James
A relevant life policy is a single-life death-in-service arrangement. James’s company applies for the policy, owns it, and pays the premiums. To meet the relevant life conditions in section 393B of the Income Tax (Earnings and Pensions) Act 2003, the policy must be written into a discretionary trust from outset, and the benefit must go to James’s family, dependants or a charity, never to the company.
That last point matters and is widely misunderstood. If the company could receive the money and use it to clear business debt or buy out James’s shareholding, the arrangement would fail the relevant life conditions. Those objectives need key person cover or shareholder protection instead, separate products, arranged alongside, not in place of, a relevant life policy.
The policy must also satisfy several other conditions. It provides life cover only, with no critical illness or disability benefit and no investment element. It has no surrender value at any point. Benefits must be payable before age 75, so the cover has to end by then. And tax avoidance must not be a main purpose of the arrangement.
The Trust Arrangement
The trust is set up at the same time the policy is applied for, using the insurer’s own relevant life trust wording. It is a discretionary trust. James completes an expression of wish naming his wife and children, but the trustees retain discretion over who receives what.
That discretion is not a drawback, it is the mechanism that keeps the benefit outside James’s estate. A trust with fixed, absolutely entitled beneficiaries would not achieve the same result. James typically appoints himself and one or two others as trustees, or uses the insurer’s trustee service.
On a claim, the insurer pays the trustees, who then distribute according to the trust terms and the expression of wish. Because the money is held in trust rather than passing through James’s estate, it usually reaches the family without waiting for probate.
The Cost Position, How to Think About It
The honest comparison is not “how much does the premium cost” but “how much gross income does each route consume”.
Paying personally. James would fund a personal policy out of income he has already paid tax on. As a higher-rate taxpayer, every pound of premium has to be funded from income that has suffered 40% income tax and employee National Insurance, and the company has also paid employer National Insurance (15% above the secondary threshold) on the salary or bonus used to fund it. The gross cost to the business of putting a given amount of premium into James’s hands is therefore substantially more than the premium itself.
Paying through a relevant life policy. The company pays the insurer directly. The premium is not normally treated as a taxable benefit in kind for James, so there is usually no P11D entry and no employee income tax or National Insurance. There is no employer National Insurance on it either.
Corporation tax relief. Premiums are generally allowable as a deduction provided they satisfy the “wholly and exclusively for the purposes of the trade” test. This is not automatic and is not guaranteed. Relief is a matter for HMRC and can be challenged, particularly where the level of cover is disproportionate to the individual’s remuneration, or where the arrangement looks like a reward for shareholding rather than for employment.
Where relief is available, the value of the deduction depends on the company’s corporation tax position. For the 2026/27 financial year the small profits rate is 19% for profits up to £50,000 and the main rate is 25% for profits above £250,000, with marginal relief in between producing an effective marginal rate of 26.5% on profits in that band. A company’s actual saving therefore depends on where its profits sit, and this should be confirmed with its accountant rather than assumed.
Taken together, that is the core of the efficiency argument: the same cover is funded from pre-tax company money rather than post-tax personal income, with no benefit-in-kind charge on the director.
Inheritance Tax, What the Policy Does and Does Not Do
This is the area where relevant life policies are most often oversold, so it is worth being precise.
What the policy does. Because the benefit is paid into a discretionary trust rather than to James personally, the payout does not form part of his estate for inheritance tax purposes. Had James instead held a personal policy with no trust, the payout would fall into his estate and could be taxed at 40% on the amount above the available allowances.
What the policy does not do. It does not reduce the value of the rest of James’s estate. His house, savings and business interest are worth exactly what they were worth before. The policy adds money to the family outside the estate; it does not subtract anything from inside it.
The spousal exemption point. If James leaves everything to his wife, transfers between spouses and civil partners are exempt from inheritance tax without limit. In that scenario there would be no inheritance tax bill on first death whether or not the policy existed. The relevant life trust is doing useful work, but the benefit shows up on second death, and in keeping the payout outside the estate that eventually passes to the children, not in producing a saving on first death.
James also needs to be aware that discretionary trusts can in principle be subject to periodic and exit charges. In practice a relevant life trust normally holds no value until a claim and pays out shortly afterwards, so charges rarely arise, but the position should be confirmed with an adviser.
The Lump Sum and Death Benefit Allowance
One point that rarely appears in comparisons but often matters most for directors with meaningful pension savings: death benefits paid from registered pension schemes and from registered group life schemes count towards the Lump Sum and Death Benefit Allowance, currently £1,073,100. A relevant life policy is a non-registered arrangement and does not count towards it.
For James, whose pension pot is growing, that means a relevant life policy adds cover without eroding the allowance available to his pension death benefits. If he had access to a registered group scheme instead, it would.
What Happens If James Leaves or Closes the Company
The policy is owned by the company and depends on James being an employee or director of it. The company cannot continue paying premiums for someone who is no longer an employee and still expect the tax treatment to hold.
Most insurers allow the policy to be assigned to the individual, or to a new employer, without further medical underwriting, subject to the provider’s own terms. That matters if James’s health changes during the term, because it means he is not forced back into the market as a worse risk. It is worth checking the assignment terms before choosing an insurer, not after.
What James Should Do Next
James should speak to a qualified financial adviser who arranges relevant life cover regularly. An adviser will assess how much cover is actually appropriate against his mortgage, income replacement need and business borrowing, obtain real quotes across the market, and make sure the trust is completed correctly at outset. Getting the trust right at the start is what determines whether the tax treatment holds, it is far harder to correct afterwards.
He should also speak to his accountant to confirm how the premiums should be recorded in the company accounts and whether the “wholly and exclusively” test is comfortably satisfied at the level of cover proposed.
And he should review it. If his remuneration, mortgage, family circumstances or business structure change, the level of cover and the expression of wish should be revisited.
Important information
This article is for general information only and does not constitute financial, tax or legal advice. It is not a personal recommendation. “James” is an illustrative example created for this article and is not a real client. No premium figures are quoted because premiums depend entirely on individual circumstances and insurer underwriting.
Tax treatment depends on your individual circumstances and on current legislation and HMRC practice, both of which may change in the future. Corporation tax relief on relevant life policy premiums is not guaranteed and is subject to HMRC’s “wholly and exclusively” test. Inheritance tax outcomes depend on your full estate position and how your estate is left. The information here reflects our understanding of the rules as at August 2026.
Life insurance policies have no cash-in value at any time. If premiums are not maintained, cover will end and no benefit will be paid.
You should speak to a qualified financial adviser before proceeding, and to an accountant or tax adviser regarding the tax position of your business.