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HMRC internal manual

Employment Income Manual

Employer-financed retirement benefits schemes: relevant life policies

[Notice: the guidance on this page should be read with the notice at the top of EIM15015.  However, relevant steps involving relevant life policies are likely to be excluded from the employment income through third parties charge – see EIM45605.]

Relevant life policy types

Sections 393B(3)(c) and 393B(4) Income Tax (Earnings and Pensions Act) 2003

Sections 480 to 482 Income Tax (Trading and other Income) Act 2005

A payment from an employer’s life policy would normally have the character of a ‘relevant benefit’ under an employer financed retirement benefits scheme (EFRBS). However, the payment is not chargeable under the EFRBS provisions if it’s made from a relevant life policy. It is excluded from the definition of a relevant benefit and only relevant benefits paid from an EFRBS are taxed by section 394 ITEPA 2003. See EIM15021.

The payment of premiums to fund the policy does not attract a charge under the EFRBS provisions, but may be taxable under other provisions. A benefit in kind charge may be exempted by section 307, depending on the circumstances - see EIM21800.

A relevant life policy is one of the following 3 types of life insurance policy. While all these policy types are relevant life policies within the EFRBS rules, only the first is an ‘excepted group life policy’ for capital gains or other purposes.

(a) Excepted group life policy

A policy which meets all the criteria to be an excepted group life policy. These are explained in the Insurance Policy Taxation Manual from IPTM7020.

(b) Policy for an individual that would otherwise be an excepted group life policy

A policy which provides for the payment of benefits on the death of a single individual and the following excepted group life policy conditions would be met if they referred to the insurance of the life of the single individual:

  • a capital sum is payable on the death in any circumstances of the insured individual who dies under a specified age that does not exceed age 75
  • there is no surrender value, and the only sums or benefits are those permitted (see IPTM7030)
  • the beneficiaries are restricted to individuals and charities (see IPTM7035)
  • tax avoidance is not a main purpose (see IPTM7040).
(c) Life policy with excluded benefits

A policy that would qualify as an excepted group life policy or the equivalent life policy for an individual, as (a) and (b) above, but for the fact that it provides for any of the following excluded benefits:

  • benefits in respect of ill-health or disablement of an employee during service (see EIM15044)
  • benefits in respect of the death by accident of an employee during service (see example EIM15315)
  • benefits prescribed by regulations (see EIM15021)

The benefits from this type of combined policy will not be subject to an EFRBS charge, but depending on the particular circumstances may be chargeable under another employment income provision.

The excluded benefits must have the character of relevant benefits, for example to be paid on or in anticipation of retirement. This is particularly relevant where provision is made for loss of health, even if it could result in premature termination of employment. Depending on the circumstances, payment may not necessarily be regarded as made on or in anticipation of retirement. The provision simply for compensating for the employee’s loss of health is not a retirement benefit and so cannot be an excluded benefit within a relevant life policy.

Policy held in trust

An employer will often set up a life policy provision within a discretionary trust. If the trust is a registered pension scheme, the EFRBS and relevant life policy provisions cannot apply. The exemptions and tax charges in respect of registered pension schemes apply instead. See the Pensions Tax Manual.