Protection insurers are questioning whether Aviva's new business protection policy with an integrated critical illness component is allowable within HMRC tax treatment of relevant life plans.
Rival insurer Legal & General has confirmed it is examining the legislation of what constitutes a CI plan and is intending to raise the issue with the Treasury.
Today (5th February) the revenue denied a recent report that a HMRC spokesperson had refused to comment on the tax implications of Aviva's policy by saying "We do not comment on every Mickey Mouse product launched."
A spokesperson for HMRC told COVER: "We do not comment on identifiable products."
A Relevant Life Plan is a tax efficient way for an employer to arrange Life Cover, with the benefit paid out to the employee's family or financial dependants.
Insurer views
A spokesperson for L&G warned that Aviva's policy conflicts with legislation laid down by the Income Tax (Earnings and Pensions) Act 2003, part 6 chapter 2 and Income Tax (Trading and Other Income) Act 2005 sections 481 and 481).
She said: "We are currently re-examining the legislation and will be raising the issue with the HMRC to get further clarity on the situation. Our first responsibility has to be to our policyholders and advisers and we do not want to make any changes to our product which could jeopardise its adherence to the HMRC rules and it retains its current tax efficient position.
"Currently we are of the opinion that the Legal and General Relevant Life plan does meet this legislation."
She added that L&G would look to add CI to business protection if it was determined that the policy would retain its tax efficient status in the eyes of HMRC.
Royal London also raised concerns. Ian Smart, product architect at Royal London said: "We are looking at this closely to form our own opinion as to whether this is actually possible but have concerns that this could prompt HMRC to think again about whether the legislation around relevant life policies is working as originally intended."
Meanwhile, Dougy Grant, protection director at Aegon said: "It's something we're looking at very closely. We're waiting for some assurance from HMRC about tax treatment, especially around the exemption from the benefit in kind charge."
Peter Hamilton, head of retail propositions at Zurich UK Life added: "We've noted the launch of Aviva's new business protection proposition with interest and are currently reflecting on the legal and tax implications.
"The Relevant Life market has been a positive story and it's good to see how adviser interest and engagement has grown over the years, and this move could provide an additional boost."
Johnny Timpson, protection specialist at Scottish Widows, said:"It's always good to see innovation in what is still a relatively small yet growing business line through the introduction of a critical illness benefit with the exception of children's definitions.
"We're interested to see how increased scope of cover will be viewed by HMRC against a backdrop of wider discussions including the taxation of registered group life and excepted life schemes. We have no current plans to replicate Aviva's move but will monitor market feedback."
Myles Rix, managing director, protection at LV= said:"Product innovation is a good thing but Aviva's interpretation of the rules does appear to contradict our understanding.
"We are seeking further legal advice and asking HMRC for clarity on the rules to see if the existing legislation is working as intended."
Adviser views
Alan Lakey, director of CIExpert said: "A number of companies have previously looked at whether CIC can be added to Relevant Life and have been advised that it is not possible.
"Aviva has been advised by two separate QCs that it is within the rules. I think that this highlights how rules and regulations are open to wide interpretation. The issue that is not being discussed, and should be, is how such policies will benefit society as a whole."
He added: "The lure of tax relief will convince many employers to effect an essential form of protection which might ensure that their business is able to continue trading as opposed to making employees redundant due to the employers critical illness. The cost to the state in unemployment benefit, means-tested benefits and the like cannot really be assessed but is likely to be extremely high.
"Consider also the employer who can now afford private treatment. This speeds up his treatment and recovery and takes a weight off the NHS and therefore the Exchequer.
"This situation highlights the short-termism and bottom-line thinking that has and continues to permeate through governments and HMRC."
Meanwhile, Craig Hernen, a business protection adviser said: "The original approval of the ‘relevant Life plan' was that the benefit of the claim falls into the hands of the beneficiary of the relevant life trust. Therefore, the employee does not benefit from the proceeds and subsequently the employees P11D ( benefit in kind) status is unchanged.
With the addition of ‘Critical Illness' being added to the relevant life plan, this would contradict the original purpose as the claim on critical illness falls into the hands of the life assured, the employee. Therefore the employee benefits financially from the plan.
"If you look closely at Aviva's brochure explanation on the addition of critical illness to their Relevant Life offering, the devil seems to be in the detail of how the ‘Income Tax ( Earnings and Pensions) ACT 2003 ("ITEPA)' is interpreted. Part of the ‘act' defines ‘benefits in respect of ill health or disablement of an employee during service' which it seems Aviva have explored via Queens Council on what this is defined as, and more so what it can include.
"The product has certainly ‘turned heads' in the protection market and I expect other providers to follow suit should the legal challenges hold."
Aviva's position
Meanwhile an Aviva spokesperson confirmed that Aviva had liaised with HMRC and sought legal advice over the policy's development.
She said: "Relevant Life Insurance is complex, but under the current tax legislation these plans can include critical illness benefit (it's the same legislation that lets providers include a terminal illness benefit).
"On our Relevant Life launch we have liaised with the HMRC and taken legal advice on this from a QC who has confirmed that our product is compliant with the relevant legislation and therefore qualifies as a relevant life plan. We take great care to assess our products before putting them into the market."
