Are you a business owner where the success of your company relies heavily on one or a few key individuals? If something were to happen to them, like illness or an accident, it could hit your profits hard. That's where "key person insurance" comes in - it's a safety net for your business in case these important people can't work.
When Can You Deduct Insurance Costs? Knowing when you can save money by deducting insurance premiums is essential. Let's break it down:
For Business Only: If you get key person insurance solely to cover losses if your key person can't work, you can deduct the premiums. Basically, if the insurance is purely business-focused, it's deductible.
Not Just for Business: If you're getting the insurance for reasons other than just business - say, to protect the value of shares of directors who own a lot of the company - then you can't deduct the costs.
Type of Life Insurance Matters: If it's a life insurance, you can only deduct costs if it covers the person's death within a set time and doesn’t offer other perks. Also, the insurance shouldn't last longer than the person's usefulness to your company.
Regular Costs vs. One-Time Costs: The insurance costs should be regular, ongoing costs (like monthly premiums) for them to be deductible. One-time costs or premiums that are like investments won't be deductible.
Insurance Linked to Loans If you're taking a key person insurance because of a loan condition, the rules change a bit. For individual business owners, you can't deduct these premiums. For companies, special loan rules apply, making these premiums non-deductible too.
What If the Insurance Pays Out?
If you were able to deduct your premiums, any money you get from the insurance will be taxable. But if your premiums weren't deductible, the money you get is tax-free.
For the nitty-gritty details, always check with the HMRC guide or speak to an accountant.
Looking to make sense of your finances? Reach out to Hamollisons Bookkeeping Services for clear and simple guidance!