The issue of tax deductibility of key-person insurance premiums and the taxability of key-person insurance proceeds has been (and still remains) open to debate and there are numerous tax cases which have attempted to give an answer one way or another.
The general rule is that the premiums are deductible where the policy is designed to compensate the company for the loss of trading profits arising under a “key” employee’s death. Any receipts under that policy are then taxed as trading income.
The issue becomes murky when the policy could also benefit the shareholders, in which case the premiums may not be deductible but the receipts may still be taxable as trading income.
It is also not sufficient to merely disallow the premiums in the hope that insurance receipts are non-taxable – a common mistake made by taxpayers.
Ultimately, the treatment of premiums paid and proceeds received is at the discretion of the local tax office and it is up to the taxpayer to defend the position.
It is important therefore that, before you prepare your corporation tax computations, you look carefully at the terms of the policy, who is covered, what their relationship is to the company, as well as keeping hold of evidence detailing the reasoning for taking out the policy in the first place. Please read our factsheet for further detail or contact Nikhil Oza firstname.lastname@example.org