The UK market offers a large choice of insurance policies and, while there may be many similarities between them, some also yield unique benefits which may be of interest to you as a business owner. A particular category to bear in mind are the so-called tax efficient insurance policies. For an insurance policy to be considered tax efficient, it typically means that it provides certain tax advantages either to the policyholder or the beneficiaries.
One of the main ways in which a life insurance policy can be considered tax efficient is if it counts as a tax-deductible business expense, thus reducing your business’s overall tax liability. For example, an appropriate Directors Life Insurance policy can be selected from one of the HMRC-approved policies, and the premiums paid through the business. In case of the death of the named Director or employee, this type of policy can pay out a lump sum which, in addition to helping to take care of the bereaved family, can also be used by the business in a variety of ways. A knowledgeable financial advice company can help you to understand the range of potential benefits and select the right policy for your business’s needs.
Other meanings of ‘tax-efficient’ insurance policy
Below are some other ways in which an insurance policy can be considered tax efficient. Please bear in mind that this is a highly specialised area of tax law and individual advice from an independent insurance expert is a must.
Tax-Free Death Benefits: Many life insurance policies in the UK pay out a lump sum to the beneficiaries upon the policyholder’s death. This payment is generally free from income tax and capital gains tax. However, it may not be free from inheritance tax. The current threshold for inheritance tax is £325,000 as a total value of the deceased person’s estate, and the tax rate on anything above this amount (bar a few exceptions) is 40%. Point 2 below outlines how it may be possible to avoid this pitfall.
Inheritance Tax (IHT) Planning: Life insurance policies can be structured in a way to mitigate inheritance tax liabilities. By placing the policy in a trust, the payout does not form part of the policyholder’s estate, which can help reduce or eliminate IHT.
Understanding and leveraging these aspects can make insurance policies a valuable part of a broader tax and estate planning strategy in the UK.