Inland Revenue has recently updated its position on the income tax treatment of “key person” insurance. This is where a business takes out a term life insurance or an illness/disability insurance policy over an employee or other key person.
Where the business takes out such a policy to protect against the loss of income and profits due to the death or incapacitation of a key person, and the business pays the premiums and receives the benefit of the policy, the premiums may be deductible for tax purposes. However, any pay-out under the policy is likely to be income. By contrast, if the policy is required by a bank as a condition for providing finance or if the purpose is to allow for the repayment of a shareholder advance or other loan, or to purchase the shares of the deceased person, the premiums will not be deductible. However, any pay-out will not be taxable. Where the purpose of the insurance policy is to protect against loss of profit and to allow repayment of a loan, some portion of the premium may be deductible. An acceptable method for apportioning the premiums between the deductible (and taxable) purpose and the non-deductible (and non-taxable) purpose must be used.
For advice on the tax treatment of your insurance policies talk to your local Findex tax adviser.