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Wholly and exclusively?

22 November 2000
Issue: 3784 / Categories:
Wholly and exclusively?
A sole-trader hairdresser client has purchased new premises with a bank loan which was granted on the basis that he takes out insurance on his own life, so that the loan will be repaid in the event of his death, and also critical illness insurance so that the loan repayments can continue to be met if he falls ill.
I have advised him that the premiums on these policies are not a tax-deductible expense, but neither would any monies received from claims under the policies be taxable.
Wholly and exclusively?
A sole-trader hairdresser client has purchased new premises with a bank loan which was granted on the basis that he takes out insurance on his own life, so that the loan will be repaid in the event of his death, and also critical illness insurance so that the loan repayments can continue to be met if he falls ill.
I have advised him that the premiums on these policies are not a tax-deductible expense, but neither would any monies received from claims under the policies be taxable.
However, he contends that since the premiums are paid wholly and exclusively for his business, he should be able to claim them, and I wonder if I have missed anything. Is there any way that tax relief can be granted on such premiums?
(Query T15,712) – Beehive.

The advice given by 'Beehive' to his client is entirely correct. It is suggested by this writer that the client's logic is ill conceived and based on wishful thinking. As far as the client is concerned, he cannot operate the business from those premises without owning the freehold, and cannot achieve that without the bank loan. Considering the bank will not grant him the loan without the heath and life insurance cover which it regards as necessary, the client feels the premiums must be eligible for tax relief.
However, section 74, Taxes Act 1988 states that expenses must be disallowed if they are not 'wholly and exclusively laid out or expended for the purposes of the trade, profession or vocation'. This amply encompasses the expenses referred to, for the following reasons:

Life premiums
The Revenue would, rightly in my view, contend that the primary purpose of the premiums is to repay the property loan in the unfortunate event of the borrower's death, prior to the planned repayment date. This saves the lender from having to auction or otherwise sell the property to recoup the loan in such circumstances, and protects the borrower's heirs by preventing loss of value due to a forced sale. This reason alone is enough to disqualify the expense as a tax deduction, since any resultant benefit to the business is merely incidental.

Critical illness insurance
The primary purpose of this is very similar to the life premiums. If the client were to be unable to work for a protracted period through critical illness, the lender's investment might be threatened, and its position compromised if arrears of loan repayments were to bring about a forced sale. Therefore it is now commonplace for lenders to insist on critical illness cover, but that does not make it 'wholly and exclusively etc'.

I hope that this further amplification will assist the client to understand the legal processes involved. If he insists on claiming these as deductions, against all advice, suitable disclosure will have to be made on the relevant tax return in order to prevent the practitioner from being vulnerable or culpable in a possible investigation scenario. – G.J.F.

This is an either/or situation. The treatment described in the query is perfectly correct. If the premiums are paid privately, claims proceeds are not taxable. The repayment on death policy is simply private life insurance, and the repayments cover is just sickness or accident insurance.
If the premiums were paid by the business and charged to revenue, as they could be, claims proceeds would be part of the turnover and, thus, of the taxable profit. Except as to the interest included in repayments, there would be no allowable expense to offset. So the net amount recouped to cover the administration would be inadequate. But there is an experiment that might be of interest.
Taking each policy in turn, and in the case of the sickness policy considering a full year of benefit, together with the benefit from any general sickness policy run by the business:

 Gross up the claim value at the marginal tax rate(s) and determine the proceeds needed to provide net of tax the amount required for the loan or repayment.
 Obtain a quotation for the premium needed to secure the enhanced insurance cover, and evaluate tax relief thereon.
 Compare the enhanced premium, net of tax relief, with the unrelieved premium now paid privately. Which is smaller?

If the net expense under the present system is less than the net cost of insuring through the business, continue so doing. Otherwise, consider rewriting the policy affected. In the case of the death policy, remember that the loan balance is falling. See that the cover and premiums are automatically adjusted accordingly. – Man of Kent.

Editorial note. One applauds 'Man of Kent's' lateral thinking, but doubts if the Revenue would accept his solution. There is some mandate for his view, as it has a certain symmetry with the treatment of the premiums and payments under permanent health policies as described in sections 580A and 580B, Taxes Act 1988, inserted by section 143, Finance Act 1996, and previously granted by Revenue press release REV6, 28 November 1995 and explained in A83 of Revenue Pamphlet IR1.
But an opposing statement appears in the Tax Bulletin, February 1992 at page 13, where the Revenue states that life insurance is not considered to be allowable as an incidental cost of obtaining finance.



Issue: 3784 / Categories:
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