TL;DR
WeCovr explains how UK company directors can use a business trust with Relevant Life Insurance to provide a tax-free death-in-service payout directly to their families, bypassing Inheritance Tax and probate.
Key takeaways
- Relevant Life Insurance is a tax-efficient death-in-service benefit paid for by your limited company.
- A business trust legally separates the policy payout from your business and personal estate.
- Using a trust ensures the life insurance payout is fast, protected from creditors, and free from Inheritance Tax.
- The process involves appointing trustees and naming beneficiaries on a trust form provided by the insurer.
- Failing to use a trust can result in a delayed payout and a potential 40% Inheritance Tax charge.
Ensuring your death-in-service payout goes directly to your family, not the taxman
As a company director or small business owner in the UK, you provide for your family through hard work and dedication. It's only natural to want that security to continue even if you're no longer around. A 'death-in-service' benefit is a cornerstone of this planning, offering a substantial lump sum to your loved ones.
However, a standard personal life insurance policy, even one paid by your business, can create a significant and often unexpected tax problem. Without the right legal structure, the payout could be treated as part of your estate, making it liable for a 40% Inheritance Tax (IHT) bill.
This is where Relevant Life Insurance combined with a Business Trust becomes one of the most powerful and tax-efficient tools available to UK limited companies. It allows your business to pay for your life cover, claim the premiums as a legitimate business expense, and ensure the full, tax-free payout goes directly to your family, quickly and without complication.
This definitive guide explains everything you need to know about setting up a business trust for your Relevant Life policy, ensuring your financial legacy is protected and delivered exactly as you intend.
What is Relevant Life Insurance?
Relevant Life Insurance is a standalone, single-life 'death-in-service' policy taken out and paid for by a business for one of its employees or salaried directors. It pays out a tax-free lump sum to the employee's chosen beneficiaries if they die while employed by the company.
Think of it as a private death-in-service scheme for businesses that are too small to justify a full group life insurance scheme.
Key features of a Relevant Life Policy:
- Paid for by the Business: The limited company pays the monthly or annual premiums.
- Tax-Efficient Premiums: The premiums are typically considered an allowable business expense, meaning they can be offset against your corporation tax bill.
- No Benefit in Kind: Unlike many other perks, the policy is not treated as a P11D benefit in kind for the employee. This means no extra Income Tax or National Insurance contributions for them to pay.
- High Cover Levels: You can typically secure cover for a significant multiple of your total remuneration (salary, dividends, and bonuses), often up to 25 or 30 times, depending on your age.
- Must Be Written in Trust: To achieve all its tax benefits, the policy must be placed into a discretionary business trust from the outset.
This type of cover is specifically designed for directors of their own limited companies, contractors, and employees of small businesses who want to provide for their families in the most tax-efficient way possible.
The Problem: Without a Trust, Your Payout is at Risk
Setting up a Relevant Life policy without a trust is a critical error that negates its primary purpose. If a policy is not written in trust, the death benefit is, by default, paid directly to the company that owns the policy.
This creates a cascade of severe problems:
- The Payout Becomes a Business Asset: The lump sum lands in the company's bank account. If the business has outstanding debts, loans, or faces insolvency, creditors could lay claim to this money. It is not ring-fenced for your family.
- Delayed Access to Funds: To get the money from the business to your family, the remaining directors would have to formally distribute it. This can be a complex and slow process, especially if the deceased was the sole director.
- A Devastating Inheritance Tax Bill: Once the money is paid out from the business to the family, it becomes part of the deceased's estate for Inheritance Tax (IHT) purposes. Any amount of the estate above the available nil-rate bands (currently £325,000 per person, with an additional £175,000 for a main residence passed to direct descendants) is taxed at a flat rate of 40%.
Let's look at the stark reality of this.
| Scenario | With a Business Trust | Without a Business Trust |
|---|---|---|
| Policy Payout | £1,000,000 | £1,000,000 |
| Where the money is paid | Directly to the Trustees | To the Limited Company |
| Time to reach family | Typically a few weeks | Months, or even years (after probate) |
| Inheritance Tax (IHT) on payout | £0 | £400,000 (40% of the £1m payout) |
| Amount received by family | £1,000,000 | £600,000 (or less, after probate and other costs) |
| Protection from business creditors? | Yes, fully protected | No, at risk |
As the table shows, failing to use a trust can wipe out hundreds of thousands of pounds from the benefit intended for your family, handing it directly to the taxman instead.
The Solution: The Discretionary Business Trust
A business trust is a simple legal arrangement that ensures the proceeds of your Relevant Life policy are paid to the right people, at the right time, with maximum tax efficiency. Most insurers provide their own standard trust wording, making the process straightforward with expert guidance.
Here’s how it works in practice:
- The Settlor: Your limited company is the 'settlor'—the entity that creates the trust and pays the premiums for the policy held within it.
- The Trustees: You appoint 'trustees' who are legally responsible for managing the trust. These are typically other directors, trusted individuals, or a professional trustee. Their job is to make a claim on the policy and distribute the proceeds to the beneficiaries.
- The Beneficiaries: These are the people you want to receive the money—your spouse, civil partner, children, or other financial dependants. In a discretionary trust, you list a class of potential beneficiaries, giving the trustees flexibility to act in their best interests at the time of claim.
- The Trust Fund: The 'trust fund' is the Relevant Life Insurance policy itself.
When the life assured passes away, the insurer pays the lump sum directly to the trustees. Because the money is held "in trust," it sits completely outside of both your business's assets and your personal estate.
The Four Key Benefits of Using a Business Trust:
- Avoids Inheritance Tax: The payout is not considered part of your estate, so it is not liable for the 40% IHT charge. This is the single biggest financial advantage.
- Bypasses Probate: The trust avoids the need for a Grant of Probate, a legal process that can take many months or even years. Trustees can access the funds and distribute them to your family within weeks of a claim being approved.
- Protects from Creditors: The money is legally ring-fenced. It cannot be touched by business creditors if the company fails, nor can it be targeted by personal creditors.
- Control and Flexibility: You define the potential beneficiaries, and the discretionary nature of the trust allows your trustees to make decisions based on your family's circumstances at the time, which is particularly useful if your children are minors.
Step-by-Step Guide: How to Set Up the Trust
Setting up a business trust is a crucial part of the Relevant Life Insurance application process. At WeCovr, our advisers guide every client through this at no extra cost, but it's important to understand the steps involved.
Step 1: Choose the Right Relevant Life Policy
Before you can create a trust, you need the policy. It's vital to compare policies from across the UK market. Insurers have different underwriting criteria, premium rates, and maximum cover levels. An expert broker can find the most competitive and suitable plan for your specific circumstances—your age, health, occupation, and desired level of cover.
Step 2: Complete the Insurer's Trust Form
Every insurer that offers Relevant Life policies will provide their own standardised business trust deed. This is usually a straightforward form that you complete at the same time as your insurance application. It is vital this is completed accurately.
Step 3: Appoint Your Trustees
You need to appoint at least two trustees. These individuals will have the legal responsibility to manage the trust.
- Who can be a trustee?
- Other directors in your company.
- A trusted friend or family member (who is not also a beneficiary).
- A professional trustee, such as a solicitor or accountant (this may incur fees).
- What are their duties?
- To hold the trust deed safely.
- In the event of a claim, to contact the insurer and complete the claim forms.
- To receive the payout from the insurer.
- To distribute the funds to the beneficiaries according to the trust deed and your letter of wishes.
You, as the life assured, cannot be a trustee of your own trust.
Step 4: Name Your Beneficiaries and Write a Letter of Wishes
The trust form will ask you to name the class of beneficiaries. This is typically your spouse/civil partner and children/step-children.
Alongside the formal trust deed, it is highly recommended that you write a separate 'Letter of Wishes'. This is an informal document that is stored with the trust deed. It provides guidance to your trustees on how you would like them to distribute the funds. For example, you might suggest:
- "I wish for my spouse, [Name], to receive 70% of the trust fund."
- "I wish for the remaining 30% to be divided equally between my children, [Names], once they reach the age of 21."
This letter is not legally binding, which gives the trustees the flexibility to adapt to changing circumstances, but it provides clear direction and makes their job much easier. You should review and update your letter of wishes every few years or after a major life event.
Step 5: Sign, Date, and Witness the Deed
The final step is to execute the trust deed correctly. This means it must be signed by the settlor (an authorised person from your company) and the trustees, and each signature must be witnessed by someone who is independent (not a party to the trust). An incorrectly signed or witnessed deed could be declared invalid.
Common Mistakes to Avoid with Business Trusts
Getting the trust setup right is critical. Here are the most common and costly mistakes we see people make.
- Not Using a Trust at All: The most fundamental error. This exposes the payout to IHT and creditors, defeating the purpose of the policy.
- Delaying the Trust Setup: The trust should be established at the same time as the policy. Trying to place an existing policy into trust later can be complex and may have adverse tax consequences.
- Incorrectly Completing the Forms: Simple errors like missing signatures, incorrect dates, or illegible handwriting can invalidate the entire trust. This is why professional guidance is invaluable.
- Choosing Unsuitable Trustees: Appointing someone who is unreliable, doesn't understand their legal duties, or may have a conflict of interest is a recipe for disaster. Choose people you trust implicitly to act in your family's best interests.
- Failing to Update Beneficiaries: A trust set up 10 years ago may not reflect your current life situation. After a divorce, remarriage, or the birth of more children, you must review your letter of wishes to ensure it's up to date.
- Storing the Trust Deed Incorrectly: The trustees and the business should all hold a copy of the executed trust deed. If the only copy is lost, it can create significant legal hurdles during a claim.
Working with an experienced broker like WeCovr helps eliminate these risks. Our team ensures that all paperwork is completed accurately and that you understand every step of the process.
Relevant Life vs. Other Business Protection Insurance
It's important to understand how Relevant Life Insurance fits into the broader landscape of business protection. Each type of cover serves a distinct purpose.
| Insurance Type | Primary Purpose | Who gets the payout? | Tax Treatment of Payout |
|---|---|---|---|
| Relevant Life Insurance | Provides a death-in-service benefit for an employee's family. | The employee's family (via the trust). | Free of IHT, Income Tax, and Capital Gains Tax. |
| Key Person Insurance | Protects the business from the financial loss of a key employee's death or illness. | The business itself. | Typically received by the business tax-free. |
| Shareholder Protection | Provides funds for remaining owners to buy a deceased owner's shares from their estate. | The surviving business owners (often via a trust). | Structured to be highly tax-efficient. |
| Executive Income Protection | Replaces a director's income if they are unable to work due to long-term illness. | The employee (via the business). | Paid to the business tax-free, then paid out as salary. |
While Key Person and Shareholder Protection policies protect the business itself, Relevant Life Insurance is purely for the benefit of your family. It is a personal benefit, funded in the most tax-efficient way possible by your company.
How WeCovr Makes Setting Up Your Policy and Trust Simple
Navigating the world of business protection can seem complex, but it doesn't have to be. As an independent, FCA-regulated brokerage, WeCovr specialises in helping company directors and business owners put the right protection in place.
Our service is designed to give you clarity and confidence:
- Market-Wide Comparison: We are not tied to any single insurer. We compare Relevant Life policies and premiums from all the major UK providers to find you the an appropriate level of cover at the most competitive price.
- Expert Guidance on Trusts: Our advisers are experts in business trusts. We provide the correct trust forms and guide you through every question, ensuring they are completed accurately and witnessed correctly. This service is included at no extra cost.
- Hassle-Free Application: We handle the paperwork and liaise with the insurer on your behalf, from application to policy issue, saving you valuable time.
- Ongoing Support: We are here for the life of your policy. We can help you review your cover and update your letter of wishes as your circumstances change.
- Wellness Included: As part of our commitment to our clients' wellbeing, all WeCovr customers receive complimentary access to CalorieHero, our AI-powered calorie and nutrition tracking app, to support their health goals.
Securing your family's future is one of the most important financial decisions you will make. A Relevant Life policy in trust is the smartest way for a business owner to do it.
Frequently Asked Questions (FAQs)
Do I need a solicitor to set up a business trust for Relevant Life Insurance?
What happens to the Relevant Life policy if I leave or close my company?
Can I have more than one Relevant Life policy?
Is a Relevant Life policy payout always guaranteed to be tax-free?
Take the first step towards securing your family's future today.
A Relevant Life policy is a simple, affordable, and highly tax-efficient way for your business to provide comprehensive financial protection for your loved ones. Don't leave their security to chance or risk a huge IHT bill.
Contact a WeCovr adviser today for a free, no-obligation quote and expert guidance on setting up your policy and trust correctly from day one.
Sources
- Financial Conduct Authority (FCA)
- GOV.UK (HMRC Employment Income Manual)
- Association of British Insurers (ABI)
- Office for National Statistics (ONS)
Disclaimer: This is general guidance only and does not constitute formal tax or financial advice. Tax treatment depends on individual circumstances, policy terms, and HMRC interpretation, which cannot be guaranteed in advance. Whenever applicable, businesses and individuals should always consult a qualified accountant or tax adviser before arranging such policies.
