Tax problems often arise in connection with partnerships, where the partner who retires or dies is due to receive a capital sum corresponding to his share in the partnership.
In most cases, providing this out of the current funds or earnings of the partnership is difficult if not impossible, and in an extreme case there may be no alternative to breaking up the partnership to release the money.
Life insurance is a most convenient way of ensuring that such capital sums are readily available.
Apart from the obvious benefit that capital sums provided through insurance policies are free of income tax, partnership insurance also allows for an equitable sharing of the costs of protecting the future of the partnership among its members.
The normal method of doing this is for each partner to insure his life under trust for the other partners.
The lowest cost method involves the use of term assurance but for long-term planning with investment benefits the better alternative may be the with-profit whole-life policy. Since the youngest partner, who stands to benefit most from the continuance of the partnership, will pay the lowest premium, some adjustment is necessary. This may be done by reapportioning the partnership earnings when the policies are taken out, so that the oldest partner, paying the largest premium (and standing to derive least benefit from the scheme), draws a larger proportion so as to reduce the net cost to him of the policy.
This method ensures that each partner is able to claim tax relief on the premium he pays, as the policy is on his own life. It is also possible for each of the partners to insure each other's lives, but in this case tax relief is not available. Another possibility is for a joint whole-life policy to be arranged to cover all the partners, the sum assured being payable on the first death.
Mr Carter, a widower of 63, has built up a business he would like to pass on to his son. His liability to CTT on death would be £1115,000, and so he takes out a non-profit whole-life policy with a £1115,000 sum assured. The policy is written under trust for the benefit of his son. If this were not done, the policy proceeds would be added to his estate and also attract tax, but in this way the proceeds will be exempt. The annual premium is about £1700 gross or £1577.5 after tax relief.
Where husband and wife are both living and do not wish the assets to pass to their... see: Life Insurance Example 7 and 8