Key Person Insurance (aka; Keyman)
An employer may take out in their own favour a policy insuring against loss of profits resulting from the death, critical illness, sickness, accident or injury of an employee, director or other 'key person'.
The premiums on such a policy will be deemed an allowable business expense if all the following conditions are met:
Where these conditions outlined above are satisfied, the premiums will be deductible, and sums received under such a policy will be income of the employer's trade under S106 ITTOIA 2005 for unincorporated businesses and S103 Corporation Tax Act 2009 for companies.
There are certain conditions where endowment policies on the life of a key person may be taken out as a condition of the provision of long-term finance. However, the cost of the policy would be deemed incidental to obtaining the finance. HMRC would not allow relief on a premium categorized as an incidental expense. We can provide further guidance on this if required.
The premiums on such a policy will be deemed an allowable business expense if all the following conditions are met:
- The sole purpose of taking out the insurance is the trade purpose of meeting a loss of trading income that may result from loss of the services of the key person, and not a capital loss.
- In the case of life insurance policies, they must be term insurance, providing cover only against the risk that one or more of the lives insured dies within the term of the policy, with no other benefits. The insurance term should not extend beyond the period of the employee's usefulness to the company.
- There are some policies that combine life insurance and investment. Premiums on whole life or endowment policies, or critical illness or accident policies with investment content - such that premiums contribute to a capital investment - are capital expenditure and will not be deductible (an allowable expense). Precedent set in the courts; see Earl Howe v CIR [1919] 7 TC 289.
Where these conditions outlined above are satisfied, the premiums will be deductible, and sums received under such a policy will be income of the employer's trade under S106 ITTOIA 2005 for unincorporated businesses and S103 Corporation Tax Act 2009 for companies.
There are certain conditions where endowment policies on the life of a key person may be taken out as a condition of the provision of long-term finance. However, the cost of the policy would be deemed incidental to obtaining the finance. HMRC would not allow relief on a premium categorized as an incidental expense. We can provide further guidance on this if required.