What is important is ensuring both adequacy and relevance of the Sums Assured, benefits and features.

What is often not taken into account is the liability to Corporation Tax (trading receipt).

Why is this important? If we consider the genuine purpose of Key Person Assurance Protection is to provide the ‘ultimate disaster recovery strategy’ (i.e. liquidity and the fund required to meet the cost of direct replacement of the key executive and the preservation of profits), there is a general expectation that Corporation Tax will apply to the sums assured.

*Multiple of Executive Remuneration i.e. 5-10xs Remuneration i.e. £150,000 = Sum Assured range from £750,000 - £1,500,000.
*Proportion of gross profits attributed to the Key Person ‘Executive’ i.e. profits £1,800,000 xs Key Person remuneration £200,000 / div ‘Employees’ Salaries @ £1,200,000 = £300,000 multiplied by the number of years (usually no more than five years), Sum Assured = £1,500,000.

There are individuals with outstanding abilities and vision. These are very often the founders, designers, inventors, creators of what will become world class businesses and will as a result, require extra special attention.

Key Person Assurance Protection Taxation Treatment Life of Another (input & output).

In Key Person Assurance Protection, the correct legal term is Life of Another - where one legal entity insures another legal entity, on the basis of ‘proving’ a financial insurable interest. In order to create a legal valid contract a clear demonstrating of insurable interest must exist at inception when the contract goes into force.

My interpretation and views are derived out of 37 successful years’ experience of dealing, advising, underwriting and the handling of all payment of claims.
I therefore believe my submission given the facts of the case set out the facts and advice pursuant!  Therefore all the facts of each case are relevant.  

Principally there is absolutely nothing written into statute about Key Person Assurance, and therefore no legislation exists, meaning univocal sanction.

I can therefore offer no guarantee that HMRC will view the same facts and interpret these with the same outcome.

From my own personal experience entering into correspondence directly with HMRC for guidance is a fruitless practice as they will rightly never make comment.

The stance of HMRC is that they will investigate taxation post event once they are able to study the forensic facts.

The taxation treatment in this context is reference to liability to Corporation Tax affecting the premium ‘input’ and the benefits output ( or Sum Assured), as a consequence of an event, i.e. a valid claim being made against the Key Person Assurance Protection policy/ies.

Note: If the Grantee (policyholder / owner) i.e. the Company, and the ultimate beneficiary, decides not to claim Corporation Tax relief in respect of the premiums, the taxation outcome in regards to the benefits is not guaranteed on that act alone. One cannot simply assume when the benefit is paid in the event of a valid claim, HMRC would not seek to tax the proceeds. Whilst this might appear obvious and reasonable in shorthand to most advisers, we cannot adopt or rely on this assumption alone, even though given the general consensuses that exists within the industry. Whilst I concede this might well be the case, it is not exactly true and cannot not be relied upon.

The lack of decisive clarity and the complexity is not helped by the fact there is nothing written in statute on this specific subject, and therefore the matter of taxation and the final decision rests with the Local Inspector of Taxes. The taxation implications will be affected depending on the option chosen, and will differ depending on the circumstances, i.e. what the purpose of the contract is for and the application of funds.

The genuine nature of the Key Person Assurance Protection i.e. disaster recovery, cost of replacement of key executives, protection of company profits (P&L), or is the policy to be used to redeem a debt i.e. bank debt, mortgage, loan notes, thus protecting capital and ‘balance sheet, is a good start.

HMRC will not enter into advanced dialogue or agreement about how they will treat the premiums and the benefit in the event of claim  at application stage, nor prior to a claim being submitted. Clearly, HMRC will never prejudice their position irrespective of the option and strategy pursued, even though this will no doubt have relevant taxation implications on both the premium (input), and in the event of a valid claim (output).

A Key Person Assurance policy is established on behalf of an individual by the Grantee (the policy / holder owner) for disaster recovery in order to protect profits, cover the direct costs of replacing or recruiting a new  and to provide working short-term capital protec profits and avoid losses during business disruption. On this basis it is highly likely Corporation Tax relief in respect of the premiums would be granted, and it is highly likely the Sum Assured will be taxable as a trading receipt, and thus subject to Corporation Tax. Thus the position is neutral i.e. less premium (net cost) after Corporation Tax relief and less benefit after Corporation Tax liability.

In essence, with the benefit of Corporation Tax relief, the premium will be lower, and therefore the Sum Assured could be increased to take into account and reflect the liability to  Corporation Tax deduction. Unfortunately, the taxation implications are slightly more complicated and as I explained earlier, there is no clear statute legislation regarding this area of taxation.

The principles are laid out in a statement made by Sir John Anderson at the time when he was Chancellor of the Exchequer in 1944,  and are often open to interpretation by the industry and HMRC. How the contributions and therefore any benefits the Sum Assured of the policy are treated for taxation purposes essentially centres on and revolves around three main areas:

*The person being insured (the life assured and ‘genuine’ key person) the relationship must be employer/employee. A significant equity stake in terms of Key Person Assurance generally means 5% or more, will generally mean no Corporation Tax relief on the premium.  

*The purpose/nature of the protection: replacement of key executive or debt redemption debt. ‘Genuine’ key person to meet loss of profits, cost of replacement due to the loss of the key person services.
  
*The term of the contract’s short-term nature: five years (term assurance), or longer (whole of life).

In simple terms, the Key Person Assurance Protection could be treated in one of two ways, taking into account the above three considerations:

A – The contributions are treated as a deductible business expense (profit and loss), and any claim being treated as a taxable trading receipt of the company and liable to Corporation Tax.

B – The contributions are not treated as a tax-deductible business expense, and payment of any claim is not treated as a trading receipt for the company, therefore not subject to Corporation Tax.

If the individual being insured is not a shareholding employee ( which broadly translates to owning less than five per cent (5%) of the shares in the business), and the policy is to cover loss of profits (disruption) and replacement only, (i.e. is not to pay off loans debt ETC), and is annual, or a short-term assurance (usually interpreted as five years or less than five years, with no investment element), then the plan should be treated as A for tax purposes.  If any of these criteria were not satisfied, then the Key Person Assurance Protection plan would very likely be treated as B.

The Grantee policyholder is well advised to maintain a clear detailed record providing coherent direction, confirming the strategy. This is always preferable and as we might need to rely upon the ‘bible’ of documents (including the board minutes of the Grantee) at some point in future should a valid claim arise, and ensued by an inspection from HMRC.

Please note: Often where there are ‘two’ distinct requirements, then we advise the creation of two policies be considered.

In conclusion, there is no guarantee of the taxation treatment outcomes of both the premium input, and the proceeds output, arising from the Key Person Assurance Protection policies by HMRC until the date of the event, when HMRC are able to analyse all the evidence, and make their own informed decision on review of the forensic evidence.

We therefore cannot rely upon what is a widely held myth, that regardless of the above, if a premium does not qualify for Corporation Tax relief, then the proceeds (i.e. sum assured) in claim will not be taxed. This is simply not true.

The levels and bases of taxation and reliefs from taxation can change at any time and are dependent on individual circumstances.