£850,000 Relevant Life Plan Structured for a Company Director – Improving Tax Efficiency and Reducing Potential Future Inheritance Tax Exposure

Our client, a property developer and director of his own limited company, approached LDN Finance for a review of his existing protection arrangements. The majority of his personal wealth was held within property investments.

Several years earlier, the client had arranged an £850,000 life insurance policy in his personal name to provide financial security for his family in the event of his death.

The existing policy was personally owned, with premiums funded from post-tax personal income. As the policy had not been written into trust, the proceeds would ordinarily have formed part of the client’s estate for inheritance tax purposes.

Whilst assets passing to a spouse are generally exempt from inheritance tax on first death, the policy proceeds could ultimately have increased the surviving estate’s inheritance tax exposure for future generations.

Using current inheritance tax thresholds for illustration purposes:

Nil-rate band: £325,000 Potential additional estate exposure attributable to the policy proceeds: £525,000 Indicative inheritance tax exposure at 40%: approximately £210,000

The exact inheritance tax position would depend on the wider estate structure, ownership arrangements, availability of transferable allowances, residence nil-rate bands, and future succession planning arrangements at the time of death.

In practical terms, a significant portion of the cover intended to support the family could potentially have been exposed to inheritance tax unnecessarily. Given the client’s wealth was largely property-based, this may also have created future liquidity pressures when settling estate liabilities.

This issue had not previously been identified and was uncovered during the protection review. It is a common situation amongst business owners who originally arranged life cover personally and have not revisited the structure as their wealth and company position evolved over time.

Antony Cotchobos, Protection Adviser, carried out a full review of the client’s existing protection arrangements and identified that a Relevant Life policy was likely to provide a more suitable structure for the required cover.

The existing personally-owned policy was reviewed alongside a Relevant Life alternative, comparing ownership structure, premium funding, taxation considerations, and potential estate planning implications.

For many company directors, protection policies are often initially arranged personally without reviewing whether the structure remains appropriate as circumstances, business profitability, and personal wealth evolve. In this case, the review identified an opportunity to improve both tax efficiency and estate planning positioning.

A new Relevant Life policy was arranged through the client’s limited company for the same level of cover (£850,000) and structured in line with Relevant Life policy requirements. Once the new policy was fully in force, the original personally-owned cover was cancelled to ensure continuity of protection throughout the transition.

The client now has £850,000 of life cover in place through a Relevant Life policy funded by the limited company and written into discretionary trust for the benefit of the chosen beneficiaries.

Structuring the policy in this manner is intended to help ensure the proceeds fall outside of the client’s estate for inheritance tax purposes and may help avoid delays associated with probate.

The arrangement also improved the funding efficiency of the cover. Subject to HMRC rules and the company’s individual circumstances, premiums may qualify as an allowable business expense where the “wholly and exclusively” test is satisfied. Relevant Life policies can also often be arranged without creating a benefit-in-kind charge for the employee or director.

Importantly, the level of protection remained unchanged. However, the structure surrounding the cover was significantly improved from both a tax-efficiency and estate planning perspective.

In addition, funding the policy through the limited company may improve overall affordability when compared with paying personally from post-tax income. Subject to HMRC rules and the company satisfying the “wholly and exclusively” test, premiums for Relevant Life policies are often treated as an allowable business expense for corporation tax purposes, which can reduce the effective net cost of the cover to the business depending on the company’s rate of corporation tax.

At LDN Finance, we specialise in protection advice for company directors and business owners. We review existing arrangements, identify structural inefficiencies, and implement tax-efficient protection solutions aligned with wider financial planning objectives. For specialist advice on Relevant Life cover for directors, visit  https://ldnfinance.co.uk/protection/business/relevant-life-cover/