Business protection – Loan protection

Key facts

• Will not meet the 'wholly and exclusively' test
• No tax relief on premiums
• The plan is taken out on own life and placed in trust

Where a plan is taken out to repay a business loan in the event of the death or critical illness of a partner, member or sole trader, the tax treatment of the premiums and the proceeds are quite straightforward.

Since the plan will have been taken out to protect the capital of the business, it wouldn’t meet the ‘wholly and exclusively’ test under section 34 ITTOIA 2005, which means it’s unlikely that tax relief will be given on premiums.

Where the cover is designed to repay a partnership loan, we usually recommend that the partners concerned take out own Life Cover and place it under a business trust for the other business partners.

In the event of a claim, they would receive benefits from the trust and then pay their share of the money into the business to pay off the debt. In the case of a sole trader, loan protection would be taken out on their own life and placed into trust for their family to pay off the outstanding loan on death.

No tax relief would be due on paying the premiums through the business, since the plan is specifically for loan protection purposes (HMRC tax bulletin February 1992).

Do you want to find out more about Key Person Protection?

For information regarding Key person protection and to speak with one of our Independent Financial Advisors today

Please call us at our Brighton & Hove office

 or email [email protected]

IEP Financial is authorised and regulated by The Financial Conduct Authority (FCA)