Is keyman insurance tax deductible?
This aspect is relatively complex and we know from experience that it’s not widely understood. The HMRC guidance regarding key person policies states:
- If the sole purpose is meeting a loss of trading income that may result from loss of the services of the key person, and not a capital loss or a condition associated with a loan; and
- the policy is a term policy that does not extend beyond the period of the employee’s usefulness,
then generally, the premiums will be tax deductible.
If the premiums are tax deductible, the proceeds will be taxed as income of the business.
Conversely, if the policy does not meet these tests, the premiums will not be tax deductible and the proceeds may be tax free. However, HMRC cannot give future assurances that the proceeds will be tax free just because the premium is not allowable against tax.
It’s therefore very important to take advice in this area and to review any existing cover that you may already have in place, to ensure the structure you have has the potential to provide tax free proceeds.