Want to know more about relevant life policies?
The following questions and answers should give you everything you need to know.
What are they?
The Bright Grey RLP is a single life, stand-alone death-in-service plan.
They are governed by the same legislation that deals with group schemes. However unlike most large employer provided schemes they are 'non–registered', so do not fall under pensions legislation.
What do they do?
RLPs provide life cover for the benefit of employees' and directors' dependants paid through a discretionary trust. They are taken out and paid for by the employer.
Who is allowed to have one?
Any employee of a business, including directors. The business can be a limited company, a partnership, a charity or a sole trader.
However we cannot cover sole traders or equity partners themselves where they are taxed under schedule D.
'Salaried' partners who are taxed as schedule E can be covered.
What is the target market?
- Small companies who have too few members for a group scheme.
- High earners who do not want their group death-in-service lump sum benefits to be amalgamated with their lifetime pension allowance.
- Employees who are looking to top up the benefits they receive from their employer’s scheme.
Why are they tax efficient?
Premiums
- Premiums paid by the employer are not treated as a P11D benefit and are not taxed back on the employee. For a higher rate taxpayer in a small company this can reduce costs by up to a third.
- There are no National Insurance implications on either the employee or the employer.
- Subject to the company's accountant/local tax inspector accepting that the premiums are 'wholly and exclusively for the purpose of trade' as part of the remuneration of the employee, then they may be relievable as a trading expense. This is a bit of a difficult area to be precise on as different inspectors and accountants will have different views. Being a relatively new concept there is no HMRC precedent on this that we are aware of.
- Premiums do not count as part of the annual pension allowance for tax purposes.
This diagram shows the effect on the company of paying for an ordinary life policy and having it treated as a benefit in kind. It then looks at a RLP assuming tax relief is available.
Benefits
- Benefits are payable free of income tax.
- Benefits are normally free of inheritance tax. In exceptional circumstances there could be a periodic tax charge on the trust. For full details on this see the 'Trust' section below.
- Unlike lump sums paid under a registered scheme, RLP benefits do not form part of the employee’s lifetime allowance for pensions. There is a limit (£1.8 million for tax year 2010/2011) that you can accumulate over a lifetime in your pension 'pot'. Any lump sum payments (as opposed to dependant's pension) under a registered scheme fall into this pot and any payments to the estate in excess of this is taxed at 55%, so a RLP is a useful vehicle for high earners to opt out of a group scheme.
Are there any restrictions?
Yes. To qualify for RLP status there are certain requirements the plan has to meet.
- It must provide only life cover. No disability or critical illness benefits are allowed.
- The term cannot exceed the 75th birthday of the employee.
- No surrender value is allowed – Bright Grey policies don't have surrender values.
- Benefits must be payable to an individual or charity, or to a trust. We insist on the plan being written through a discretionary trust to ensure we comply with this requirement.
- It must not be set up for tax avoidance purposes. To avoid this happening we insist on using a trust for all cases.
What type of life cover can be written?
We will allow level, decreasing or increasing cover. We will also allow renewable term assurance.
Can cover be increased?
Yes. Cover can be increased each year without evidence of health using the RPI increase option within the 2-10% interest rate range.
Alternatively fixed increases can be used up to 5% each year.
Other increases are allowed at any time but will require health evidence.
How much cover can be provided?
Since 'A' day the statutory limits on the amount of cover that can be provided have been removed. However we do have a maximum we are prepared to cover which has been agreed with our re-assurers.
This is 15 times the remuneration of the employee. Remuneration can include salary, bonus, and dividends paid in lieu of salary plus any taxable benefit in kind.
The reassurers also have a 'jumbo risk' limitation. This will be £10 million per company.
There is no need for financial underwriting up to £1.5million per employee. After that we would require evidence of earnings. This could be a copy of a P60 or 3 months' salary slips or a letter from the employer confirming income. For a small company we might require external confirmation from the accountant or copies of thaccounts to show dividend income.
Can different covers be provided?
A relevant life policy can only include life cover but you can have multiple life covers with different terms within the plan as long as they are all for the purpose of providing benefits for dependants.
You cannot use the same plan for other key person or ownership protection benefits.
How does the trust work?
We use a discretionary trust with the potential beneficiaries being family members, although there is the ability to include non-family members such as a live in partner.
The employer is automatically a trustee but we do require at least one additional trustee. This can be anyone but we normally recommend that the additional trustee is an officer of the company (director/company secretary) to reinforce the commercial aspect of the arrangement.
The life assured can be a trustee, but if this is the case there must be an additional trustee unless corporate body is a trustee.
For single person companies with no company secretary this will have to be an external person. It could be a spouse or the company's accountant or solicitor. On death the trustee duties of the company will have to fall onto the executors or administrators of the estate who will either carry out those duties or appoint someone else.
In all cases we recommend that a nomination form is completed to direct the trustees as to whom they pay benefits to. This is not binding on them but in most cases will guide them and speed payments up.
Trust Taxation
In exceptional circumstances a periodic charge could be levied on any assets in the trust on any of the 10-year anniversaries. For this to happen death would have to take place very close to this anniversary leaving the trustees no time to pay the benefits out. The charge would be a maximum of 6% of the assets in the trust.
If the 10-year charge applies then there could also be an exit charge when assets are paid out. In theory this could also be up to 6% if the assets remain in the trust for the next 9-plus years, however assuming benefits are paid out just after the anniversary the charge will be insignificant.
It is unlikely that these charges will apply in the vast majority of cases.
Can the trust be incorporated with a spousal by-pass trust?
Yes. In the beneficiary box put the by-pass trust in as a potential beneficiary and nominate that trust under the nomination form.
Is there a replacement policy option?
No there isn’t, however we don’t need one. When an employee leaves service the trustees can appoint the policy back to the employee and they can then continue it as a personal policy. They could even put it into a personal trust if they chose to.
If the policy is going to be assigned to the life assured on leaving service there is a 2-step process. First of all the trustees would need to make an irrevocable absolute appointment in favour of the life assured. The trustees would then need to assign the policy to the life assured. The deed of assignment we currently have is not suitable for this purpose and we are working on producing a new form.
Alternatively if the employee goes to another employer, or starts a new company up, the new company can take over the policy and pick up the premiums. In these circumstances we would recommend that the trustees are changed to the new employer.
These options may often be better than those offered under a group scheme. Some schemes don’t offer a replacement policy while those that do can be expensive.
How do we quote?
I you're on the Exchange use the new business protection option on the opening quotes page. This should be used.
Alternatively use Assureweb and input as business protection
Or login to quote & apply to obtain the quote from our business protection quote menu inputting as key person cover.
Click here for full details and documentary support for RLPs
How do we submit business?
Business should be submitted on a business protection application form (cannot be submitted on line at the moment) with the RLP trust.
Ensure the RLP tick box is selected on the application.
Submit to our normal address:
Bright Grey
2 Queen Street,
Edinburgh,
EH2 1BG
Important Note
The information in this Q&A section is based on our understanding of the tax law and practice at the date of publication. These may be affected by future changes and individual circumstances. You should therefore always seek professional advice before entering into any arrangement.
