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Keyman Insurance & Corporation TaxHMRC Rules Explained
Understanding how keyman insurance interacts with corporation tax is essential for UK limited companies. Premiums may be deductible, but the rules are specific and depend on policy purpose.
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Understanding the corporation tax treatment of keyman insurance is important for UK limited companies.
- -Premiums may be deductible against corporation tax if HMRC criteria are met
- -Policy must be solely for business benefit (not personal)
- -Must cover loss of profits - not loan repayment
- -Key person must be an employee (not just a shareholder)
- -If premiums are deductible, any payout is taxable as trading income
- -Relevant HMRC guidance: Business Income Manual BIM45525, S103 CTA 2009
When Are Keyman Insurance Premiums Corporation Tax Deductible?
HMRC allows corporation tax deductions for keyman insurance premiums when specific conditions are met.
Policy Purpose: Loss of Profits
The policy must be intended to cover loss of profits that would result from the key person's death or illness. Policies designed to repay loans or provide capital do not qualify for tax deduction.
Solely for Business Benefit
The policy must exist solely to benefit the business. If there is any personal benefit (e.g. payout to the key person's family), the premiums are not deductible.
Key Person is an Employee
The insured person must be an employee of the company. Policies on shareholders who are not employees do not qualify. Directors who are also employees do qualify.
Term Matches Service
The policy term should reasonably match the expected period of the employee's service. A 30-year policy on someone near retirement is unlikely to qualify.
No Capital Element
The policy must be a term assurance (no cash-in value). Whole of life policies or those with an investment element are not deductible.
Annual Premium Reasonable
The premium amount must be reasonable relative to the cover and the key person's financial value to the business. HMRC can challenge excessive premiums.
Tax Treatment: Deductible vs Non-Deductible Scenarios
Real-world scenarios showing when keyman insurance premiums are and are not corporation tax deductible.
Scenario: Sales Director Cover
Key Person Insurance
Company insures sales director for 3x profit contribution. Purpose: cover lost revenue if they die. Term: 10 years. RESULT: Likely tax deductible.
Other Product
Same policy but payout assigned to director's family trust. Purpose includes personal benefit. RESULT: Not tax deductible.
When you need it: Ensure the policy beneficiary is the company, not the individual or their family.
Scenario: Shareholder Protection
Key Person Insurance
Policy taken out on employee-director to cover business profit loss. Director also holds shares. RESULT: May be deductible if purpose is clearly business protection.
Other Product
Policy specifically to fund share buyback from deceased shareholder's estate. RESULT: Not deductible - this is a capital purpose, not revenue.
When you need it: Shareholder protection policies are generally NOT tax deductible. Keep them separate from key person cover.
Scenario: Business Loan Protection
Key Person Insurance
Key person cover for lost profits, amount happens to match loan value. Business is the beneficiary. RESULT: Potentially deductible if genuinely for profit loss.
What Happens to the Payout?
The tax treatment of the payout depends on whether the premiums were deducted.
If Premiums Were Deducted
The payout is treated as taxable trading income for the company. It will be subject to corporation tax at the prevailing rate (currently 25% for profits over £250,000).
If Premiums Were Not Deducted
The payout is typically a capital receipt and not subject to corporation tax. This is the case for loan protection and shareholder protection policies.
Practical Implications
Even if the payout is taxable, the business still receives significant net benefit. A £500,000 payout taxed at 25% still provides £375,000 to the business after tax.
Keyman Insurance Corporation Tax FAQs
Is keyman insurance corporation tax deductible?
Keyman insurance premiums may be corporation tax deductible if the policy meets HMRC criteria: it must be solely for business benefit, cover loss of profits (not loans), the key person must be an employee, and the policy term should match their expected service. If these conditions are met, premiums can be deducted as a business expense.
Is the payout from keyman insurance taxable?
If the premiums were deducted as a business expense, the payout is treated as taxable trading income subject to corporation tax. If premiums were not deducted (e.g. for loan protection), the payout is usually a tax-free capital receipt.
Can I deduct shareholder protection premiums from corporation tax?
Generally no. Shareholder protection insurance is designed to fund a capital transaction (buying shares from a deceased's estate), so premiums are not deductible against corporation tax. Only policies covering loss of trading profits may qualify for deduction.
What HMRC guidance covers keyman insurance tax treatment?
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