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HMRC internal manual

Business Income Manual

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Specific deductions: insurance: employees and other key persons

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 allowable 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. Guidance on possible non-trade purposes is at BIM45530.
  • In the case of life insurance policies, they are 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.

The premiums on whole life or endowment policies, or critical illness or accident policies with an investment content - such that premiums contribute to a capital investment - are capital expenditure and will not be deductible, see Earl Howe v CIR [1919] 7 TC 289.

Key person policy associated with loan finance

Endowment policies on the life of a key person may be taken out as a condition of the provision of long-term finance.

For the purposes of unincorporated businesses, the premiums on such policies are not regarded as ’incidental’ to obtaining the finance within the meaning ofS58 Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005) and so are not deductible. ‘Incidental costs’ are defined as ’fees, commissions, advertising, printing and other incidental matters’. The expenses listed form a class that would include any incidental costs of taking out a life insurance policy, but not the premiums, which are the cost of the policy itself.

Further guidance on the incidental costs of obtaining loan finance for unincorporated businesses is at BIM45800.

In the case of companies, the incidental costs of loan finance are covered by the loan relationships rules, see CFM30000 onwards. In short, no loan relationship debit is available under these rules for the premiums paid on such a policy as they are not considered to be incidental costs of obtaining loan finance (see CFM33060).

Key person insurance receipts - where premiums allowable

Where both 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.

Key person insurance receipts - where premiums disallowable

As a general rule, where a policy does not comply with both of the above conditions:

  • the premiums cannot be deducted, and
  • receipts under that policy are not taxed as trading income.

However, whether particular receipts are part of trading income is a separate matter of law to the deductibility of expenditure. No assurance can be given that any future receipt will be excluded from trading income even though the premiums are not allowable (Simpson v John Reynolds & Co (Insurances) Ltd [1975] 49 TC 693 and McGowan v Brown & Cousins [1977] 52 TC 8).

General guidance on insurance receipts is at BIM40750 onwards.

Insurance against paying compensation to employees

Where an employer takes out a policy to provide against an obligation to pay compensation on the death etc of employees, or where the employer insures against general liability under the law to pay compensation, the premiums are allowable as a deduction. This is because the payments are not capital expenditure (see BIM35000) and they are incurred wholly and exclusively for the purposes of the trade (see BIM37000).

Benefits paid direct to employee

As regards sickness and life insurance policies in the names of or on behalf of employees, see the guidance on pension schemes at BIM46140.