Keyperson Insurance: Tax Treatment Explained

Keyperson insurance is a business expense — a company pays premiums to protect itself against the financial consequences of losing a critical individual. In most business contexts, expenses are deductible against corporation tax. But keyperson insurance does not work that way automatically. Whether premiums are deductible, and whether the payout is taxable, depends on the purpose of the policy. Getting this wrong can result in unexpected tax liabilities at the worst possible moment.

This guide explains the HMRC approach, the tests that determine deductibility, and the specific structures that are always tax-efficient.

The Core Question: Revenue or Capital?

HMRC draws a fundamental distinction between revenue expenditure and capital expenditure when assessing whether a business expense is deductible against corporation tax.

Revenue expenditure relates to the day-to-day trading activities of the business — costs incurred in generating current-period revenue. Wages, rent, insurance premiums for business risks, and marketing costs are typical examples. Revenue expenditure is deductible against trading profits in the year it is incurred.

Capital expenditure relates to the acquisition or enhancement of long-term assets — buildings, plant, intellectual property. Capital expenditure is not directly deductible against trading profits (though capital allowances may apply).

When a business pays keyperson insurance premiums, HMRC asks: what is the purpose of this expenditure? Is it to protect revenue — to compensate the business for the lost earnings capacity of a key person? Or is it to protect a capital asset — for example, to repay a loan that is secured against the business?

The answer determines everything.

The Revenue Purpose: Deductible Premiums, Taxable Payout

Where a keyperson policy is arranged to protect the business's revenue-earning capacity — to fund the recruitment of a replacement, absorb lost revenue, or maintain business continuity — HMRC's general position is:

• The premiums are deductible against corporation tax as a trading expense
• The payout received by the company is taxable as trading income

This symmetry is internally consistent. The premiums reduce taxable profit in the years they are paid. The payout increases taxable profit in the year it is received. The net effect over time is roughly tax-neutral.

For most keyperson policies — those protecting against the loss of a sales director, a key technical specialist, or a client-facing partner — this is the treatment that applies.

The Capital Purpose: Non-Deductible Premiums, Non-Taxable Payout

Where a keyperson policy is arranged to repay a capital loan — for example, a bank facility of £500,000 secured against the business and personally guaranteed by a director — the purpose is capital. The policy does not protect trading income; it protects the balance sheet.

HMRC's position in this case:

• The premiums are not deductible against corporation tax
• The payout received by the company is not taxable (it reduces the capital cost of the loan)

Again, symmetry applies. The company receives no tax relief on the premiums, but the payout comes in free of corporation tax — appropriate for what is effectively the repayment of a capital liability.

HMRC's Five Tests

HMRC guidance (found primarily in the Business Income Manual at BIM45525) sets out the criteria it uses to determine whether a keyperson insurance premium qualifies as a revenue deduction. The five questions are:

1. Is the insurance intended to meet a recurring need? A policy that covers the ongoing risk of key person absence (i.e. a term policy renewed or maintained over the normal course of business) points toward revenue expenditure. A one-off policy for a specific transaction does not.

2. Is the benefit related to the business's revenue-earning capacity? If the sum insured is calculated by reference to lost profits or revenue impact, this points toward revenue expenditure. If it is calculated by reference to the value of a loan or the replacement cost of a capital asset, it points toward capital.

3. Is the sum insured calculated on a profit-loss basis? Where the sum insured represents an estimate of lost trading profit during the period of incapacity or after death — not the replacement cost of a fixed asset — the policy is revenue in nature.

4. Does the insurance run for a limited period? Term policies (five years, ten years) running alongside a specific business period point toward revenue. Permanent or whole of life policies are harder to categorise as purely revenue.

5. Does the policy have no surrender value or investment element? Pure protection policies (term assurance, income protection) with no cash-in value are more clearly revenue in nature. Policies with investment elements or guaranteed surrender values may be treated differently.

If all five questions point toward "yes" for revenue treatment, the premiums are likely deductible and the payout is likely taxable. If the answers are mixed — for example, the policy covers both revenue loss and loan repayment — the position becomes more complex and specialist advice is required.

The Mixed-Purpose Policy

In practice, many keyperson policies serve multiple purposes. A key director may be both the primary revenue generator and the personal guarantor of the company's bank debt. A single policy may be intended to cover both the lost revenue risk and the loan repayment risk.

Where a policy has a mixed purpose, HMRC may apportion the premium between the revenue and capital elements. It is better practice to arrange two separate policies — one explicitly for revenue protection (sum insured based on revenue impact) and one for loan protection (sum insured equal to the outstanding loan) — so that the tax treatment of each is clear. This requires more administration but avoids the uncertainty of mixed-purpose apportionment.

The Relevant Life Plan: Always Tax-Efficient

While keyperson insurance tax treatment depends on purpose and requires careful analysis, the Relevant Life Plan (RLP) has a clearly defined and highly favourable tax treatment that is established in statute.

What Is a Relevant Life Plan?

An RLP is a life assurance policy taken out by an employer on the life of an employee (including a company director). It is defined in the Income Tax (Earnings and Pensions) Act 2003, and its tax treatment follows from that statutory definition.

The Tax Treatment

• Corporation tax: Premiums paid by the employer are a deductible business expense against corporation tax. No specific "purpose test" is required — HMRC accepts this deductibility as a matter of law.
• Income tax (employer): The premiums are not a P11D taxable benefit for the employee. They do not attract income tax or National Insurance contributions. This is the most significant advantage for an owner-director who would otherwise fund life insurance from post-tax income.
• Trust structure: The policy must be written in trust from the outset, with the beneficiaries being the employee's family or dependants. The payout goes to the trust — not to the company — and is therefore completely outside the estate of the employee.
• Inheritance tax: Because the policy is owned by the trust (not the employee), the payout is outside the employee's estate for IHT purposes.
• Pension interaction: The RLP does not form part of the employee's registered pension scheme and does not count toward the pension annual allowance. (The lifetime allowance was abolished on 6 April 2024 and replaced by the lump sum allowances, so there is no lifetime-allowance interaction to consider.)

For an owner-director paying 40% income tax and 2% NI, the corporation tax deductibility and absence of P11D benefit means an RLP provides life insurance at roughly half the after-tax cost of a personally arranged policy of equivalent cover.

RLP Limits

HMRC does not permit an RLP to provide excessive cover. The sum assured must bear a reasonable relationship to the employee's earnings. Guidance generally supports cover of up to around 30 times annual earnings, though this should be confirmed against current HMRC practice at the time of arrangement.

An RLP cannot be arranged as a group scheme with an employer contribution for more than one employee through the same arrangement — each policy is individual. For businesses with multiple employees requiring life cover, a registered group life scheme or registered death-in-service arrangement is the alternative.

Shareholder Protection: A Different Analysis

Shareholder protection insurance — where a company or individual shareholders arrange life insurance to fund the purchase of shares from a deceased shareholder's estate — has its own tax analysis, and it is more complex.

Own-life policies written in trust: Where each shareholder takes out a policy on their own life for the benefit of the other shareholders, the premiums are paid personally (not by the company). There is no corporation tax deduction, but the payout goes directly to the surviving shareholders through the trust without passing through the company. This is the preferred structure for most small businesses.

Company-owned policies on shareholders: Where the company itself owns the policy on a shareholder's life, the analysis is more nuanced. The premium may have a capital purpose (protecting the company's capital structure), and the payout will likely be capital in nature. Specialist advice is essential.

Business Property Relief interaction: A properly structured cross-option agreement preserves Business Property Relief (BPR) on the shares for IHT purposes. If the agreement instead creates a binding contract for sale, BPR may be lost. This is the primary reason cross-option (double option) agreements are used rather than binding buy-sell agreements.

Common Mistakes in Business Protection Tax Treatment

Assuming all keyperson premiums are automatically deductible. They are not — the purpose matters.

Arranging a mixed-purpose policy without apportioning. A single policy covering both revenue loss and loan repayment creates ambiguity about the tax treatment of both premiums and payout.

Not updating policies as business circumstances change. A policy arranged when the business had a £200,000 bank loan may no longer match the purpose when the loan has grown to £800,000.

Confusing an RLP with a keyperson policy. An RLP is death-benefit only, goes to the employee's family, and has a defined tax treatment. A keyperson policy pays the business and has a purpose-dependent tax treatment. They serve entirely different functions.

How Global Investments Can Help

Global Investments works with owner-directors and internationally mobile business owners to structure business protection correctly — including the tax treatment of keyperson insurance, the relevant life plan, and shareholder protection arrangements.

We can review your existing policies to confirm their tax position, recommend appropriate structures for new arrangements, and coordinate with your accountants and solicitors to ensure all elements work together.

Important: Tax legislation changes, and HMRC may update its published guidance on keyperson insurance treatment. The information in this guide reflects general principles as of 2026 but does not constitute tax or legal advice. You should always obtain specialist professional advice before arranging business protection insurance.

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Global Investments provides wealth management and business protection advisory services to internationally mobile business owners and their families.