Tax treatment on business critical illness insurance payment

[russy01]

I have an example where a critical illness part of a life insurance policy has been redeemed (significant amount) and paid out to the business in question.

The policy was paid out by a reputable insurer under a business loan protection policy. I.e the business has debt and took out the policy to repay the debt in case of death or critical illness to the insured person - a senior member of the team.

Can anybody in the know (don’t need speculation), comment on how this payment is treated regarding corporation tax.

The funds are currently sat in the businesses savings accounts - but can be used to pay off a significant part of the companies outstanding debt.

Many thanks.

[craig1912]

This should help but haven’t you got an advisor? It is a little “grey” but could be treated as a taxable trading receipt.

Did the company obtain corporation tax relief on the premiums?

https://adviser.royallondon.com/technical-central/...

[russy01]

craig1912 said:

This should help but haven’t you got an advisor? It is a little “grey” but could be treated as a taxable trading receipt.

Did the company obtain corporation tax relief on the premiums?

https://adviser.royallondon.com/technical-central/...

There is an adviser, but their advice is contradictory and unclear. So, considering the CT bill would be 6 figures - it’s worth getting additional opinions.

Your reply says taxable trading receipt, but if the policy was for business loan protection, would the receipt not be capital receipt - not taxable?

[wattsm666]

You need proper advice on this, but generally if the premiums were relieved against CT then the receipt is taxable. If disallowed against profits the receipt will probably be exempt.

But get proper advice

[TownIdiot]

As ever the answer is "it depends"

LV provide a reasonable summary

https://www.lvadviser.com/business-protection/tax-...

[craig1912]

russy01 said:

Your reply says taxable trading receipt, but if the policy was for business loan protection, would the receipt not be capital receipt - not taxable?

No, read the two links to two different insurers “ In short, if the cover is set-up to protect profits, HMRC normally consider the proceeds as usual business profits or trading receipts.”

If the company had tax relief on the premiums paid then generally the proceeds of the policy will be taxed.

Easiest way of finding out is consult the local Inspector of Taxes, it is his decision at the end of the day.

[uknick]

You may want to mitigate the annual tax bill by splitting the payment over the years it relates to; matching concept and all that.

For example, if the loan was to last for 5 years and 4 years are left, I'd look at spreading the insurance payout over 4 years leaving the remaining balance as a long term liability on the balance sheet.

[Exiled Imp]

Some useful info here.

https://www.gov.uk/hmrc-internal-manuals/business-...

In summary, as has been stated above, if the premiums are tax deductible, the receipts are taxable. If not tax deductible, receipts are not taxable