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How is Business Loan Insurance Taxed?

I’ve taken out a commercial loan and I’m looking for Business Loan Insurance to make sure my company can repay the loan should I die. However, where the business pays for it, I’m not sure how HMRC treats it for tax purposes. Can you help?

Question asked by Mr R Schulls
Boat
07/08/2020

Business Loan Insurance pays out if a person responsible for repaying a commercial loan passes away or becomes critically ill.

The tax position for this protection is actually relatively simple.

Premiums do not meet the ‘wholly and exclusively for the purposes of trade’ business protection test. This refers to whether the benefit from a policy will be ‘wholly and exclusively’ for the business.

As such, premiums are therefore not usually tax-deductible because the benefit is destined for the lender, not the business. Instead, premiums are treated as a cost of raising capital. You’ll therefore not be able to claim corporation tax relief on premiums.

However, a Business Loan Insurance payout is typically tax-free. This is because the benefit isn’t ultimately destined for the business, rather is earmarked for the lender to repay the loan.

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