Critical Life insurance payout - Tax position

Critical Life insurance payout - Tax position

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My business (Limited Company, sole director) has received a large payout against a critical life policy. Is this regarded as profit because I want to invest it into expanding the business and would like to keep the companys exposure to Corporation tax as low as possible.  Any suggestions as to how we could do this?

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Euan's picture
By Euan MacLennan
08th Oct 2014 12:09

Who paid the premiums?

I am rather puzzled how a company with only one director came to receive the proceeds of a critical life policy, but the basic rule is that if the company paid the premiums and claimed them as a deduction from profits for corporation tax purposes, the company will be liable to pay corporation tax on the proceeds.

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By mrme89
08th Oct 2014 12:12

I read this as the director received the funds and wants to introduce the funds to the Ltd company. 

Can the OP please clarify the situation?

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By King_Maker
08th Oct 2014 12:49

I read it the same way as Euan - with the same response.

 

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By jarvo1234
08th Oct 2014 13:28

Clarification

Sorry Gents

 

The company paid the premiums and therefore benefited from the payout.  I was wondering if there was any way of putting the payment into a separate fund in the books as a 'development' fund (specifically to move to new premises) which would reduce the amount of CT.

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By Steve Kesby
08th Oct 2014 13:37

The premiums...

... aren't really all that relevant. The receipt is either taxable or it isn't. If the receipt is taxable and the company didn't claim tax relief on the premiums, then somebody has messed up.

You still don't say WHY? the company received the payout. Presumably somebody died (although it's entirely unclear who) and the company was the beneficiary under the policy.

What is important is the relationship between the company's business and the somebody that died. On the further assumption that the somebody was critical to the running of the business, then (assuming all other assumptions are correct), then it's a taxable receipt.

Whether or not you try and hide it in the balance sheet is up to you.

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Replying to Accountant A:
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By jarvo1234
08th Oct 2014 14:16

Further clarification

The company received the payout because the Director had a melanoma which although removed may still lead on to complications in the future, but he (me) is very much alive.  The company DID claim tax relief on the premiums. 

Thanks for your help gentlemen, I was just wondering if it were possible to use the investment against the future and therefore either spread out or reduce the CT liability (looks like it isn't).

Thanks again

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By King_Maker
08th Oct 2014 14:28

@ Steve K - critical illness cover does not just pay out on death (if part of a life insuance policy), but on the diagnosis of a specified illness (most cancers are included). I had to deal with one last year.

IMHO, it is usually a big mistake to try to claim tax relief on the premiums, as any CT will far outweigh the premium releif. I assume it formed part of a "Key Man" insurance type arrangement?

 

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Replying to bernard michael:
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By jarvo1234
08th Oct 2014 17:36

Correct

Thanks Steve, yes it was a Key Man insurance.

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By Steve Kesby
08th Oct 2014 14:41

@ King_Maker

Not claiming tax relief does not prevent a receipt under the policy being taxable (see BIM45525). If any receipt is going to be taxable, it would be foolish not to claim relief for the premiums though.

The OP had described it as a payout against a critical life policy, which drew my first assumption.

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By King_Maker
08th Oct 2014 14:59

Steve K - agreed. There is no point in not claiming tax relief, if the proceeds are going to be taxable.

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By Craigie_Bhoy
08th Oct 2014 15:00

@ Jarvo1234

Absolutely no help whatsoever i the context of the question,  just wanted to wish you well.

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By Carl Stanton
25th Sep 2017 12:44

Hi , I am in the same position myself , diagonised with a melanoma , been removed but obviously ongoing , I own the company and the premiums were paid by the company , how do I get the money out of the company to pay off my mortgage , will I pay tax , or as some one suggested , shall I pay it into my pension and hopefully draw it later

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