Companies and life policies
Companies tend to take out life policies for one of three main reasons:-
- Key man cover;
- Security on loan repayment (endowment); or
- Investment, e.g. into a single premium bond.
On key man policies the rules are generally quite straight forward; the company can obtain relief on the premiums paid and, if it does so, will be taxed on the proceeds. An alterative, possible treatment is to disallow the premiums and seek to agree with the Revenue that on this basis the proceeds will not taxed.
On the other policies, the key question with regard to deductibility of premiums is whether or not the policies are “trading”. For policies taken out to provide security for loans to buy business premises, historically there has been a special treatment in that premiums were allowed for tax purposes but, where the proceeds were used wholly to repay the loan, those proceeds were not taxable. In practice the Revenue tended to tax only the excess over the debt repayment.
For other policies the final payment on the “investment” tended to be treated as a chargeable gain.
However, the pre-budget report changed this. Under the new rules the key changes will be:-
- The proceeds of the policy will no longer be treated as a chargeable event;
- The policies will be brought within the loan relationship rules with effect from 1 April 2008.
- There will then be a deemed surrender and taxation as a chargeable gain at that date and thereafter any gain accruing under the policy will be taxed under the loan relationship rules.
If you do have such a policy it is important to contact someone for detailed advice on the implications for you.
Date: 5th March, 2008
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