Many businesses take out “key person” insurance policies to protect against the financial impact of losing an important employee, director or other individual who is central to the success of the business. These policies may provide cover for death, critical illness, sickness, accident or injury.

Whether tax relief is available for the insurance premiums depends on the nature and purpose of the policy. HMRC guidance confirms that premiums will generally be allowable as a business expense where the sole purpose of the policy is to protect the business against a loss of the individual’s services (not a capital loss). 

For life cover, relief is normally only available for term insurance policies that provide pure risk cover with no investment element. The policy term should also not extend beyond the individual’s expected usefulness to the business.

Policies with an investment or capital element, such as whole life or endowment policies, are generally treated as capital expenditure and tax relief for premiums is usually not deductible. Similar restrictions can apply where key person policies are linked to long-term loan finance.

Where premiums qualify for tax relief, any insurance proceeds received are generally taxable as trading income. Conversely, where premiums are not deductible, receipts are often not taxed, although the treatment depends on the specific circumstances.

Separate rules may also apply where employers insure against liabilities to compensate employees or where benefits are paid directly to employees under sickness or life insurance arrangements.