Business Protection

business protection

Shareholder Protection

Shareholder protection is a life assurance plan that would enable the surviving shareholders to purchase the shares from the deceased shareholder’s estate.

This would look to eliminate possible financial hardship for the deceased’s family – there being no ready market for the shares (especially if the deceased held a minority holding) or restrictions laid down in the transferability of the shares in the company’s Memorandum and Articles of Association.  The surviving shareholders find themselves sharing control of their business with an outsider who may know nothing about the business.

The type of plan and length of term will vary according to the company. Term assurance could be used to protect shareholders against death before retirement.

Advice

We are pleased to offer consultation and advice in this complicated area and have strong relationships with specialist legal professionals who can assist with any required contracts and business trusts.

Partnership Protection

You may wish to consider this area to ensure the partnership can continue when a partner dies and the surviving partners maintain control of the partnership.

What is a partnership agreement?

This ensures that the partnership doesn’t have to be dissolved and that the surviving partners can purchase the deceased partner’s share from their heirs, if they want to.

As well as a partnership agreement, one of the following should be set up alongside the protection plans:

Buy and sell agreement

This binds the deceased’s heirs to sell the share of the partnership and the remaining partners to buy it.

Cross option agreement (also called a double option agreement)

As per the buy and sell agreement, but this time the deceased’s heirs have the OPTION to sell and the surviving partners have the OPTION to buy, within certain timescales. Whichever party invokes the agreement, the other party must abide with their wishes. This form of agreement is seen as more flexible for inheritance tax purposes that the buy and sell agreement.

For these first two agreements to work, life assurance needs to be put in place to provide the surviving partners with money to purchase the partnership share from the deceased’s heirs.

Automatic accrual method
The deceased partner’s share passes automatically to the surviving partners, so there is no need for life assurance to provide cash with which to purchase the share from the deceased’s heirs. Personal life assurances may still be considered to “compensate” the heirs for the loss of the share of the partnership.

Key Person Cover

Key person cover is designed to give businesses a cash injection in order that profits are effectively maintained on the loss of a Key Person.  A Key Person could be defined as “anyone with specialist skills or knowledge, or with particularly important areas of responsibility, whose loss to a business would adversely affect its profitability”.

How much cover should be provided?

A business needs to consider how much the loss of profits would be if the key person died or suffered a serious illness. They should also think about including costs such as, recruitment, training, and loss of goodwill.

What should the term of the plan be?

This depends on the business and the keyperson. Term assurance plans would be more suitable where:

  • Tax relief on the contributions is required.
  • The keyperson may not remain key in the future.
  • The keyperson is working on a project.
  • The keyperson will be key through to their retirement.
  • The keyperson may not stay in the business long term.

It is not uncommon for short term plans of say five years to be set up on a renewable basis.

A whole of life plan may be more suitable if the keyperson is an owner of the business.

How should the plan be set up?

Whether its life cover, critical illness cover or permanent health insurance that is needed on the key person, it is the business that will want to receive, and therefore control, the benefits. Key person plans are therefore set up on a life of another basis.

What about underwriting?

As with all life of other plans, insurable interest will need to be shown. The business will need to be able to demonstrate that the level of cover is reasonable in relation to the contribution that the key person makes to the profits of the business.

What is the tax situation?

If a term plan has been affected, then HMRC may allow the company to obtain tax relief on the contributions if:

  • There is an employer/employee relationship between the life assured and plan owner.
  • The plan is to meet loss of profits only.
  • The plan’s term is no more than 5 years.
  • The proceeds of any plan that has obtained tax relief on the contributions will be taxable as a trading receipt.

We advise businesses taking out any form of key person insurance to speak to their local Inspector of Taxes to clarify their individual tax situation.

The FCA does not regulate taxation

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