Sometimes small companies take out a life policy on the main director/shareholder to cover the repayment of borrowings in the event of that persons death.
What is the Corporation Tax impact of any payout. Is it part of the company's tax able income or is there any exemption? Perhaps disallow the premiums and exclude the payout?
I assume that even if the lender is the benficiary of the policy the cancellation of the loan would result in a gain in the company.
James Davidson
Replies (2)
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Yes and no
Inspectors Manuals allow the deductions (and tax the proceeds) if:
the sole relationship is that of employer and employee;
the insurance is intended to meet the loss of trading income arising from the loss of the employee's services;
the policy is a short-term temporary assurance (long-term temporary assurances are allowable if they expire before the expected retirement date).
However, in Beauty Consultants Ltd v HMIT (2002) Sp C 321 the Special Commissioners held that if it is taken out to cover the profits of the company then it also covers the value of the company (and the shareholders) and so has duality of purpose and no relief is available. Whether this means that the proceeds would be non-taxable is another question!
Normally add back...
Generally I add back any keyman insurance for exactly the reason posted - if there is a pay out then the payment would be treated as taxable income.