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Tax saving and business contingency plans

Small businesses tend to be reliant on one or two key people. These individuals are the reason that these businesses turn a profit. Should something unforeseen happen to these people, it has huge implications for the business such as making less profit, increased staff costs or lost valuable knowledge and experience.

To protect against this, there is an insurance called keyman cover. It protects the business from the death or critical illness of a key individual. It acts as a business contingency plan, providing valuable funds directly to the business when it needs them most. An added plus for this insurance is that in some cases it can be tax deductible.

HMRC guidelines state that the insurance must: "Meet a loss of trading income arising from the loss of the service of the key person insured" and that: "Premiums are incurred wholly and exclusively" for the purpose of that business. Basically, if the insurance is taken out specifically to cover the loss of business profits and is paid for solely for the use of the business, it is a deductible business expense and is then an allowable expense for tax. 

Obviously, there are limitations, if the insurance the employee is protected by owns more than a 10% share capital, then HMRC's tax stance changes.

However, there is a completely tax-deductible insurance, which has no tax implications on payout and has been created especially for directors of small businesses. This is known as relevant life insurance. 

Relevant life cover is a singular death-in-service plan, otherwise known as life insurance. The company takes it out for the director or employee, as an employee benefit. The insurance pays out on the death or critical illness of the insured. To guarantee there are no tax implications on the payout, the cover is written into trust, bypassing inheritance tax and arriving directly with the director or employee's loved ones.

If the employee is over the age of 75, this policy will no longer be applicable.

The information in regards to tax treatment and basis reliefs are dependent on current legislation. Individual circumstances are not guaranteed and may be subject to change.

Copyright © 2015 Michael Hubbard, Keyman Insurance adviser at Business Protection Expert.

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