Key rules you need to know about Relevant Life Cover

Relevant Life insurance policies are attractive as a cost-efficient way for employers to provide death in service benefits for employees.

However, Relevant Life plans must meet strict legal requirements to be valid.

Our overview of the key rules for Relevant Life Cover, including benefits and tax legislation, explains how these policies work.

Relevant Life Cover statutory conditions

Relevant Life plans were formed from changes to pension legislation applying post-April 2006.

These changes allowed employers to set up different unregistered schemes for employee benefits with different tax concessions.

A Relevant Life policy is considered a death in service benefit and is neither a registered pension scheme nor an employer-financed retirement benefits scheme (EFRBS).

This means that these policies escape tax charges as long as they meet the statutory conditions in subsections 393B(4) (b) and (c) of the Income Tax (Earnings and Pensions) Act 2003.

To obey the statutory conditions, a Relevant Life policy must be one of the following:

1. Excepted group life policy, defined in Section 480 of the Income Tax (Trading and Other Income) Act 2005
2. Life insurance policy providing payable benefits following the death of an individual person (meeting Condition A in Section 481 of this Act, or meeting Conditions C and D in Section 481 and Conditions A and C in Section 482)
3. Life insurance that would be under a) or b) but provides an excluded benefit under paragraphs (a), (b), or (d) of subsection 3 of the ITEPA Section 393B.

These are the specific conditions from the ITTOIA 2005 the Relevant Life policy has to meet:

• Condition A, Section 481 – Under the policy terms a capital benefit becomes payable on the death in specified circumstances of the insured individual should they die under the age of 75.
• Condition C, Section 481 – The policy isn’t capable of having any surrender value, or a value exceeding the proportion of paid premiums.
• Condition D, Section 481 – No sum or benefit is payable under the policy other than mentioned in A and C.
• Condition A, Section 482 – Any payable benefit must be conferred to a beneficially entitled individual or charity by a trustee.
• Condition C, Section 482 – Tax avoidance must not be the primary aim of the policy for the holder or beneficiaries.

To put it in more basic terms, here’s a summary of the key rules a Relevant Life plan has to meet:

• Must be an insurance policy taken out and funded by an employer on the life of an employee
• The policy must provide a lump sum benefit payable on death of the employee
• Benefits are only payable during the individual’s employment term and before their 75th birthday
• Policies must be held in trust and paid out to beneficiaries if a valid claim arises
• The main purpose of taking out the policy mustn’t be tax avoidance
• The policy can include ill health benefits but mustn’t provide any other benefit or surrender value

These are the rules according to current legislation, but specific Relevant Life plans can vary between providers within the legal allowances.

Policy creation rules

In line with the statutory conditions above, only employers can apply for a Relevant Life policy on behalf of one of their employees.

The employer must be a UK resident business, such as a limited company, partnership, or limited liability partnership (LLP).

The individual being covered must be a UK resident employee.

This can include company directors and salaried partners, but sole traders and LLP members aren’t eligible because they aren’t considered employees.

When applying for the policy, the employer must complete a trust request so the plan is written into trust from the outset.

The employer must pay the premiums for the duration of the covered individual’s employment as long as the policy continues, ending before their 75th birthday.

The employee can nominate beneficiaries, but ultimately the trust decides which beneficiaries receive a payable sum and when.

All parties must acknowledge that Relevant Life cover isn’t suitable for any other benefits besides death in service or critical illness, and that it won’t cover the employee for these benefits post-employment or beyond the age of 75.

Discretionary trust requirements

A discretionary trust is an arrangement allowing a group of nominated trustees to look after the policy until a successful claim is made.

It’s a legal requirement for Relevant Life policies to be held as trust funds to make sure the benefits are paid to the right people, preventing insurance or tax fraud.

Holding the funds in trust means they can be paid out quickly without probate and they won’t be part of the deceased’s estate, so Inheritance Tax won’t apply.

There are three main roles involved in a discretionary trust:

• Settlor – the person who places the policy into trust and pays the premiums (the employer)
• Trustees – the legal owners of the fund who control the benefits and must act in the best interests of the beneficiaries
• Beneficiaries – the people who are eligible to receive payment from the fund, usually family members of the employee

A Relevant Life Plan Trust Deed (W13547) is the document creating the trust, signed by the settlor and trustees (unless it’s done online).

This should set out the roles of all the named parties involved and the details of the Relevant Life policy.

These provisions will dictate what the trustees are legally allowed to do.

The employee should also complete a Relevant Life Plan Nomination Form (W13548) to name the people they’d like to benefit from the trust fund.

Nominations aren’t legally binding like the trust deed, but trustees often use them as a guide to decide who should receive payment from the trust.

Trustees can’t profit from their roles in the trust and must be in agreement on payment decisions.

The first trustee is usually the employer, but at least 2 additional trustees should be appointed as soon as possible to avoid potential legal complications from situations such as employer liquidation or the individual leaving employment.

Legally anyone over 18 years old who is of sound mind can be appointed as a trustee, but it’s usually members of the employee’s family and/or solicitors.

The legal time limits for a discretionary trust are as follows:

• 125 years in England, Wales, and Scotland
• 80 years in Northern Ireland

Trustees have to distribute the proceeds before these time limits following a successful policy claim.

However, trustees would be failing in their legal duty to the beneficiaries if they didn’t arrange payments as soon as possible.

Beneficiary regulations

The legislation restricts potential beneficiaries of Relevant Life policies to individuals or charities.

 Relevant Life Cover beneficiaries can include:

• The employee themselves (in the case of a terminal illness claim)
• Any surviving spouse or civil partner
• Any child, grandchild, or stepchild

 The employer who takes out the policy pays the premiums, and is a trustee is not legally eligible to be a beneficiary.

 The employee usually nominates their preferred beneficiaries at the time of application, but these can be changed at any time. 

It’s usually possible to add or remove nominated beneficiaries if circumstances change by applying in writing – for example, in the case of divorce or the birth of children.

The trustees aren’t legally bound by the employee’s nominations and can choose how to distribute the funds to the most suitable beneficiaries at their discretion. 

Payable benefit guidelines

The only legally payable benefits under a Relevant Life plan are for death,as specified in the individual policy.

There aren’t statutory limits on the amount of death in service benefit payable through a Relevant Life policy.

However, the amount should be in reasonable relation to the employee’s remuneration.

This means that underwriters of Relevant Life Cover tend to set maximum limits as a multiple of the employee’s income, including salary and any other financial benefits.

The limits are usually dependent on the employee’s age bracket, and any ill-health benefit will also factor in their general health and occupation.

Tax implications

If the Relevant Life policy meets the statutory conditions as detailed above, these are the available tax concessions:

• Premiums aren’t part of the employee’s annual allowance for registered pension scheme contributions
• Benefits won’t count as part of the employee’s lifetime allowance for their pension
• Employers can treat the premiums they pay as a business expense
• Employees don’t have to pay benefit in kind tax on premiums
• Neither employers nor employees need to pay National Insurance contributions for premiums
• Payments to beneficiaries are free from income tax and inheritance tax

 Policies that don’t meet the statutory conditions will be considered employer-financed retirement benefits schemes (EFRBS) and won’t be eligible for these tax allowances.

The trust itself may be legally liable for inheritance tax charges during its existence in the following circumstances:

• Periodic Charge – Up to 6% of the value of the fund over the nil tax band may be payable on every ten year anniversary of its creation
• Exit Charge – When the benefit leaves the trust after the first ten years, the rate of tax paid at the previous ten year anniversary may be payable

 In most cases, it’s unlikely that the trust ends up paying any inheritance tax.

Interested in taking out Relevant Life Cover?

If you’re looking for independent financial advice or an insurance provider to underwrite a Relevant Life plan, don’t hesitate to contact Rigby Financial.

We can talk you through the process in even more detail and help you to create a Relevant Life policy to suit your needs.