This is one of the most common questions directors ask once they understand the tax benefits, and it comes down to the trust structure, not the company.
The Short Answer: Who Receives the Money?
The payout from a relevant life policy goes to the beneficiaries named under the discretionary trust that the policy is written into. In practice, this is usually your spouse, civil partner, children, or other family members you choose to nominate.
The payout does not go to the limited company, and it does not pass into your general estate. Under section 393B of the Income Tax (Earnings and Pensions) Act 2003, the employer cannot be a beneficiary of the policy. If the company could receive the funds to settle commercial debts or repurchase shares, the arrangement would fail the statutory conditions and lose its tax advantages.
Why a Discretionary Trust Is Mandatory
Without a trust, a payout from a policy owned by a company would be treated as a company asset or form part of the deceased’s estate. Both scenarios create significant disadvantages:
- Company Asset Risk: If paid to the business, the money could be claimed by corporate creditors or taxed as trading income before reaching your family.
- Estate & Probate Delays: If paid directly into your personal estate, the funds would be frozen until probate is granted and could be subject to 40% inheritance tax.
Writing the policy into a discretionary trust from the outset ensures the policy proceeds are ring-fenced entirely away from business liabilities and personal estate administrative delays.
The Role of the Trustees on a Claim
Trustees are the legal custodians responsible for receiving the insurance payout from the provider and distributing it to the beneficiaries. In a typical relevant life policy setup:
- Who acts as trustee: You usually appoint yourself as the initial trustee alongside your spouse, partner, an adult family member, an accountant, or a professional corporate trustee.
- How discretion works: The trustees hold legal discretion over the exact distribution. This discretion is the legal mechanism that prevents the benefit from forming part of your estate for inheritance tax purposes.
- Claim process: On death or a qualifying terminal illness diagnosis before age 75, the insurer pays the lump sum directly to the trustees’ designated bank account, usually within days of receiving standard claim documentation.
Expression of Wish vs a Will: How Beneficiaries Are Chosen
When setting up the policy, you complete an Expression of Wish (or Nomination Form). This document informs the trustees of exactly who you would like to receive the money and in what proportions.
It is important to understand the legal distinction between an Expression of Wish and a Will:
- A Will only governs assets held inside your personal estate that pass through probate.
- An Expression of Wish guides the trustees of the discretionary trust. Because trust assets sit outside your estate, they do not pass under your Will.
- While not strictly legally binding (which maintains the tax-exempt status of the trust), trustees follow the Expression of Wish in the vast majority of cases unless extraordinary circumstances arise.
What Happens If You Do Not Nominate a Beneficiary?
If no nomination form is completed or if circumstances change without an updated form, the trustees must distribute the payout among the “default class of beneficiaries” defined in the standard trust deed. This class typically includes surviving spouses, civil partners, children, parents, and direct descendants.
However, relying on the default class is far less precise than completing a specific nomination. It is best practice to review your Expression of Wish after major life milestones, such as marriage, divorce, or the birth of children.
Tax Treatment of the Payout for Beneficiaries
The financial treatment for beneficiaries is one of the primary strengths of a relevant life policy:
- Income Tax Free: The lump sum death benefit is paid to beneficiaries completely free of UK income tax.
- Inheritance Tax (IHT) Exempt: Because the proceeds pass through a discretionary trust rather than the estate, the payout is not normally subject to inheritance tax on first death.
- Lump Sum and Death Benefit Allowance: Relevant life policies are non-registered schemes and do not count towards the Lump Sum and Death Benefit Allowance (£1,073,100), preserving allowance space for pension pots.
What Happens with Minor Children or Complex Estates?
If your named beneficiaries are under the age of 18 at the time of a claim, the trustees hold the funds within the trust on their behalf until they reach adulthood. The trustees can use the income or capital for the children’s education, maintenance, and general benefit in accordance with the trust provisions.
Damian Youell
Whole of Market
Business Protection
560+ Reviews
Damian is the founder of NeedingAdvice.co.uk and an FCA-regulated protection specialist. He advises UK company directors, contractors, and business owners on structuring tax-efficient Relevant Life Policies, Key Person Insurance, and Shareholder Protection.
Providing independent, whole-of-market guidance, Damian ensures life cover arrangements comply with HMRC discretionary trust rules, qualify for full Corporation Tax relief, and sit outside personal estate calculations.
Important Information & Regulatory Context
This article is for general information only and does not constitute financial, legal, or tax advice. Tax treatment depends on individual circumstances and may change in the future. Corporation tax relief on premiums is subject to HMRC’s “wholly and exclusively” rules and inspector discretion. Life insurance policies have no cash-in value at any time. If premiums are not maintained, cover will lapse and no benefit will be payable. You should speak to an FCA-authorised financial adviser before setting up business protection.