Relevant Life Policy Trust Setup: A Director's Complete Guide

A relevant life policy is one of the most tax-efficient forms of life assurance available to company directors and employees in the UK. Yet the tax advantages depend entirely on the policy being correctly structured within a discretionary trust. Get the trust wrong and the entire tax treatment unravels. This guide explains how relevant life plans work, what HMRC requires, and how to establish and maintain the trust correctly.

What Is a Relevant Life Policy?

A relevant life policy is an individual death-in-service policy taken out by an employer for the benefit of an employee or director. The key distinction from a standard life policy is that:

• The employer pays the premiums as a business expense.
• Premiums are generally allowable as a corporation tax deduction (subject to HMRC's wholly and exclusively test).
• Premiums are not assessed against the employee's pension annual allowance.
• The death benefit is paid outside of the employee's estate — provided the policy is held in a suitable trust.

For a director of a limited company who does not have access to a group life scheme, a relevant life policy provides equivalent death-in-service benefits without the administrative overhead of running a group arrangement. It is also available to sole-director companies, making it particularly valuable for contractors and small business owners operating through a personal service company.

HMRC Conditions for a Relevant Life Policy

HMRC defines a relevant life policy under section 393B of the Income Tax (Earnings and Pensions) Act 2003. To qualify, the policy must meet all of the following conditions:

1. The employer must be the policyholder. The company takes out the policy; it is not the employee's own policy.
2. The policy must be pure life assurance only. It cannot include critical illness cover, income protection, or investment elements. This is a common misconception: critical illness cover cannot be added to a relevant life plan if the policy is to retain its qualifying status. A separate standalone critical illness policy — ideally personal, or under a separate employer arrangement — is required.
3. The life assured must be the employee (or director). The policy insures the life of the individual employed by or directing the company.
4. The benefit must be a lump sum payable on death or terminal illness (within 12 months of diagnosis), not an income benefit.
5. The policy must be held in trust. HMRC requires the death benefit to be payable to a trust, not directly to the employer.

If any of these conditions are not met, the policy ceases to be a relevant life policy and loses its favourable tax treatment.

The Trust Requirement: Why It Is Non-Negotiable

Placing the policy in trust serves two purposes. First, it satisfies the HMRC conditions. Second, and just as importantly from a planning perspective, it ensures the death benefit falls outside the deceased's estate for inheritance tax purposes.

Without a trust, the sum assured — which may be several million pounds for a senior director — would form part of the estate, attracting inheritance tax at 40% on the value above the nil rate band. Payment would also be delayed until probate was granted, which typically takes six months to a year and sometimes longer in complex estates.

With a properly constituted trust, the trustees can make payment within days of receiving the death certificate and policy documents. No probate is required. The benefit does not count towards the estate. And because relevant life plans use discretionary trusts, the trustees have flexibility to decide how to distribute the funds among the class of potential beneficiaries — typically the deceased's immediate family.

What Type of Trust Is Used?

Relevant life policies are held in a discretionary trust, typically provided free of charge by the insurer as a standard trust deed. The insurer's model trust has been drafted to satisfy HMRC's requirements and most advisers recommend using it unless there is a specific reason to engage solicitors for a bespoke arrangement.

Under a discretionary trust:

• The employer is usually the settlor (the party establishing the trust and paying the premiums).
• Trustees are appointed to manage the trust and ultimately distribute the death benefit. Typically these are the director personally and at least one other trustee — often a spouse, business partner, or professional trustee.
• Potential beneficiaries form the class from which the trustees select recipients. The insurer's standard deed typically includes the spouse or civil partner, children, grandchildren, and other dependants as potential beneficiaries.

The trustees do not receive the money for their own use. They hold it on trust and must act in the interests of the beneficiaries. When a claim is paid, the trustees consider who should benefit and in what proportions, taking into account the deceased's wishes as expressed in a letter of wishes.

Appointing Trustees

At least two trustees are required for most discretionary trusts, although a sole corporate trustee can act alone. In practice, relevant life policy trusts commonly have two or three individual trustees:

• The director themselves (as trustee during their lifetime — they step down on death, obviously)
• A spouse or civil partner
• A business partner or close associate, particularly where there is no family member available or appropriate

Trustees must be over 18, mentally capable, and not bankrupt. There is no legal requirement for trustees to be independent, but for larger sums some families prefer a professional trustee (a solicitor, accountant, or trust company) to provide oversight and avoid family disputes.

Trustees can be changed over time. Additional trustees can be appointed and existing trustees can retire. This is managed by a deed of appointment, again usually available from the insurer as a template form.

The Letter of Wishes

The trust deed gives trustees legal discretion over distribution. In practice, the director's wishes guide the trustees but do not bind them. The director should therefore write a letter of wishes — an informal document addressed to the trustees explaining how they would like the death benefit distributed.

A typical letter of wishes might say: "Please distribute the full sum assured to my spouse, [name]. If my spouse predeceases me, please divide the sum equally between my children." The letter can also express wishes about timing, whether funds should be held for minor children until they reach a specified age, and any other guidance the director considers relevant.

The letter of wishes is not legally binding, but trustees who depart from it significantly without good reason may face challenge by beneficiaries. In practice, trustees almost always follow the letter of wishes.

Update the letter of wishes whenever circumstances change — on marriage, divorce, the birth of children, or significant changes in family circumstances.

Maximum Benefit and Valuation

HMRC does not set a statutory maximum for relevant life policies, but in practice insurers and advisers apply a commercial reasonableness test. The accepted benchmark is typically up to 30 times annual remuneration, which for a director includes salary, dividends, and sometimes a reasonable expectation of future drawings.

For a director earning £150,000 in combined salary and dividends, a sum assured of £4,500,000 would be within accepted norms. Cover above this level may attract underwriting scrutiny and requires clear justification based on the individual's economic value to the business.

Where a company has multiple directors or key employees, each can have their own relevant life policy. The policies are assessed individually, not aggregated, which means cover limits apply per person rather than to the company as a whole.

Can Spouses or Partners Be Covered?

If a spouse or partner is a genuine employee or director of the same company — paid a market-rate salary for genuine work performed — they can also have their own relevant life policy. The same HMRC conditions apply: the company is the policyholder, premiums are paid by the employer, and the policy is held in a separate trust for the benefit of the employee's family.

This is particularly valuable for family companies where both spouses draw income from the business and both contribute materially to its operation. Each policy must be supported by genuine employment and commercially justifiable remuneration.

Tax Treatment in Summary

Tax head	Treatment
Corporation tax on premiums	Deductible as a business expense (subject to wholly and exclusively test)
Income tax on premiums (employee)	Not a taxable benefit in kind — no P11D entry required
National Insurance on premiums	Not liable for employer or employee NI
Annual allowance (pensions)	Relevant life premiums are not tested against the pension annual allowance
Inheritance tax on death benefit	Outside the estate — payable via discretionary trust
Income tax on death benefit	Tax-free lump sum to beneficiaries

This combination of tax reliefs is difficult to replicate through any other single product. A director who instead took a higher salary and used it to fund a personal life policy would pay income tax at up to 45% on the salary, employer and employee NICs, and the premiums would come from net income. The relevant life route provides identical life assurance at a fraction of the after-tax cost.

Common Errors to Avoid

Adding critical illness cover to the policy. As noted above, HMRC requires the policy to be pure life assurance. Adding CI cover — even as a small rider — disqualifies the policy. Arrange critical illness cover under a separate arrangement.

Failing to place the policy in trust before the first premium. Trust is a condition of the HMRC treatment, not an optional add-on. The trust deed should be signed before or simultaneously with the policy inception. Some insurers will accept a short grace period, but do not rely on this.

Allowing the trust to lapse. If trustees resign without replacement, the trust may lack the minimum number of trustees required to act. Check annually that trustees are still in position and willing to act.

Forgetting to update the letter of wishes. Circumstances change. A letter of wishes written before children were born may not reflect current intentions. Review it alongside any annual protection review.

Confusing relevant life with registered group life. Relevant life plans are not registered pension schemes. They do not need to be registered with HMRC as a pension. They are governed by ITEPA 2003, not the Finance Act pension rules.

What Happens If the Director Leaves the Company?

If an insured director or employee leaves the company, the company typically ceases to pay premiums. Depending on the insurer and policy terms, there may be an option for the individual to take over the policy personally — sometimes described as a continuation option or portability provision. This allows the life assured to continue the cover, but they will pay premiums from personal income without the corporation tax deduction.

Some policies offer guaranteed insurability on leaving, meaning no new underwriting is required when transferring to personal ownership. This is a valuable feature for individuals with health conditions that have developed since the policy was taken out.

International Considerations

For internationally mobile directors — particularly those moving between the UK and international locations — relevant life policies have a specific residency profile. Premiums are deductible against UK corporation tax, which requires the company to be UK-based and subject to UK corporation tax.

If a director becomes non-UK resident, the company can continue paying premiums and the deduction against UK corporation tax may still apply, but specialist advice is essential. The insurer may also need to review the residency position at claim stage.

For directors of international structures, a standalone international life assurance policy held in an offshore trust may be more appropriate. Global Investments advises on both UK-based relevant life plans and internationally portable alternatives.

How Global Investments Can Help

Global Investments works with directors and senior executives across the UK, Cyprus, UAE, and other markets to structure relevant life policies correctly from inception. We review the trust documentation, advise on benefit levels, coordinate with insurers on underwriting, and help prepare letters of wishes that reflect your actual intentions.

We also provide integrated planning — ensuring your relevant life policy sits alongside your income protection, critical illness, and pension arrangements in a coherent, tax-efficient structure. If you are a director of a UK limited company without a relevant life plan in place, contact us to discuss how significant the tax saving could be for your business.

This guide is for information only and does not constitute regulated financial advice. Tax treatment depends on individual circumstances and may change. Seek independent professional advice before making protection decisions.