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Key-man policies

It's common for a business to insure key employees. There are a number of reasons - the business will obviously suffer if someone important suddenly disappears, and the policy can provide enough money for an instant replacement, or can effectively pay for the closure of the business (if the person was really irreplaceable). The question is whether the policy is part of the trade or not - if it is, the premiums will be expenses for tax, and the proceeds will be income; if it isn't, you claim no tax relief but pay no tax.

Recent cases have suggested that the policy should usually be treated as something outside the business. You have to consider why it was entered into - does it protect the trade, or is it to protect the shareholders and other investors? For example, if the policy is intended to pay off borrowings which are guaranteed by someone else, the policy is to protect the guarantor rather than the trade, and it's not part of the business.

Of course, you want the premiums to be deductible - until you have a claim, and want the proceeds not to be taxable! If you have a policy of this sort, it's worth thinking through the proper treatment in the light of the recent cases, and we will be happy to advise you.