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RJC
14th March 2013, 15:34
Hi,

I've recently been forced to give up work due to ill-health. I've submitted a claim under my income replacement insurance, which has been accepted. Unfortunately there is wording in the policy to the effect that the "benefit due will be be based on earnings that are taxable". Because I had been operating through an Employee Benefit Trust this is proving tricky. The insurer is holding firm to calculating the benefit based on the minimal salary I was paying myself. I've provided documents explaining how EBT are/were legal tax avoidance mechanisms, and copies of my contracts for the last two tax years as evidence of my earning potential but still they hold firm. Does anyone know of someone who has made a successful claim in similar circumstances, or can anyone suggest a next step?

Thanks in advance.

Alan @ BroomeAffinity
14th March 2013, 16:04
Without wishing to sound harsh, there's a common phrase about having cakes and eating them that springs to mind.

TheFaQQer
14th March 2013, 16:26
I've recently been forced to give up work due to ill-health. I've submitted a claim under my income replacement insurance, which has been accepted. Unfortunately there is wording in the policy to the effect that the "benefit due will be be based on earnings that are taxable". Because I had been operating through an Employee Benefit Trust this is proving tricky. The insurer is holding firm to calculating the benefit based on the minimal salary I was paying myself. I've provided documents explaining how EBT are/were legal tax avoidance mechanisms, and copies of my contracts for the last two tax years as evidence of my earning potential but still they hold firm. Does anyone know of someone who has made a successful claim in similar circumstances, or can anyone suggest a next step?

I think that the policy wording makes it clear - you can claim and the benefit is based on taxable earnings. Even if EBTs are 100% legal with absolutely nothing dodgy about them at all, that has no bearing at all on the insurance policy, which is limited to taxable earnings. Your taxable earnings were low, so your payout will be low; if they had been higher then the payout would be higher.

So, the next step is to claim from the policy based on what your taxable earnings are / were.

Hope you're feeling better soon.

northernladuk
14th March 2013, 16:39
We had a post quite recently about someone else that got caught out by this as he took the policy out when he was perm so had a full wage but now he is a contractor with a LTD it would only count the tiny wage we pay ourselves so effectively the policy was almost worthless. It didn't include his dividends.

I would be willing to bet there are a lot of new contractors that are in the same position and haven't thought to check.

jmo21
14th March 2013, 17:21
Without wishing to sound harsh, there's a common phrase about having cakes and eating them that springs to mind.

Sad story, but quite frankly, WJ1MTS.

Jessica@WhiteFieldTax
14th March 2013, 18:24
We had a post quite recently about someone else that got caught out by this as he took the policy out when he was perm so had a full wage but now he is a contractor with a LTD it would only count the tiny wage we pay ourselves so effectively the policy was almost worthless. It didn't include his dividends.

I would be willing to bet there are a lot of new contractors that are in the same position and haven't thought to check.

Most policies include regular dividends, or will do so on request. However get it in writing and keep the letter.

Jessica@WhiteFieldTax
14th March 2013, 18:26
I think that the policy wording makes it clear - you can claim and the benefit is based on taxable earnings. Even if EBTs are 100% legal with absolutely nothing dodgy about them at all, that has no bearing at all on the insurance policy, which is limited to taxable earnings. Your taxable earnings were low, so your payout will be low; if they had been higher then the payout would be higher.

So, the next step is to claim from the policy based on what your taxable earnings are / were.

Hope you're feeling better soon.

Another angle, maybe, is was the policy missold to you?

~ did you mention to any adviser you were using a EBT?

~ was your income verified?

~ was it explained that the policy only pays on taxable income?

If you had an IFA assisting then you may want to ask them to talk to their PI insurers.

northernladuk
14th March 2013, 19:01
Most policies include regular dividends, or will do so on request. However get it in writing and keep the letter.

Really? Even though dividend income isn't (lets include us and think about the layman) isn't affected by sickness?

I don't think you average permie would include this so it still important that you check the terms with such a big shift in employment style.

Jessica@WhiteFieldTax
14th March 2013, 21:26
Really? Even though dividend income isn't (lets include us and think about the layman) isn't affected by sickness?

I don't think you average permie would include this so it still important that you check the terms with such a big shift in employment style.

Yep - I have a typical low salary high div arrangement from my business, have done for 25 years, and have it in writing from Mr Aviva that regular divis are included.

But yes, check and get it confirmed in writing.

northernladuk
14th March 2013, 22:25
Yep - I have a typical low salary high div arrangement from my business, have done for 25 years, and have it in writing from Mr Aviva that regular divis are included.

But yes, check and get it confirmed in writing.

Interesting, you are quite right although there is some amusing wording in their policy...


If your income includes company dividends or distributions we will treat them as earnings as long as they:
are paid direct to you instead of regular salary in the 12 months before you became unable to work; and are consistent with the level of regular salary which the paying company’s trading position reasonably allows on a continuing basis.

Note: Aviva will consider a spouse’s or civil partner’s share
of the profits/dividends subject to written confirmation of
the following:
the spouse/civil partner has no actual role in the
business; and
the share of profits/dividends will cease in the event of
the Insured Person’s Incapacity; and
the spouse/civil partner’s share of profits/dividends are
not covered by any other insurance. (We will not take
into account the spouse’s/civil partner’s salary.)


It is interesting it says dividends INSTEAD of salary and not as well as.....

Also the bit about spouses doesn't seem to fit in with the way we work. It seems if you are paying your wife as many do that will not count as she will be seen as having a role in the company and also it dividends won't stop as an cash in the business will continue to be distributed... so our model fails on two counts..

Looks like a total minefield for contractors.

ASB
15th March 2013, 09:02
I think the whole ASU arena is a bit of a minefield for anybody in business on their own account. Personally I never bothered with any. I just worked on the basis that with average luck I'd be OK :-)


Though they used the word "instead" I think you may be reading too much into it. It does not imply mutual exclusivity.

e.g. payment of £10k salary and £40k dividends instead of £50k salary.

But as with all these things the devil is in the detail and getting confirmation would be advisable.

TheFaQQer
15th March 2013, 09:20
Dividends are a red herring in this case, though, since tax is paid on them. For the OP, what income was taxable? There's your answer.

I'd be prepared to argue for dividends being included if the need arose, but to try to argue that something which you paid no tax on counts as taxable income is stretching the definition a bit!

Another possibility would be to fess up to HMRC and pay the tax, and then claim on the insurance, since the EBT is now taxable income.