The unexpected death or critical illness diagnosis of a business owner is, of course, very upsetting for his or her family as well as those within the business. One of the financial implications may be that the owner's family inherits the shares but may have an urgent need for money, while the surviving shareholders may want to buy the shares but might not have the money available to purchase them. As the family need money urgently, the family decide to sell the shares, which may disrupt the stability of the company.
Each business should have a shareholder agreement in place, a shareholder agreement sets out how the shares should be valued and gives the surviving shareholders the right to buy the shares, or the outgoing shareholder the right to sell.
The combination of a suitable agreement and the correct insurance will give peace of mind that, should the worst happen, the continuing shareholders would have funds to help buy the shares and the deceased's family will receive appropriate financial compensation.
Shareholder Protection premiums are paid by the company and are tax deductible if certain criteria is met.
There are three main methods of putting the correct insurance in place:
- Own life plans under business trusts,
- Company owned plans to buy back shares,
- Life of another policies established by the shareholders, but not usually recommended due to their inflexibility.
Case Study
David, Sally and Tony are all shareholders in a successful business. The shares have been valued and they each own £400,000 worth of shares. The shares were valued on the shareholder agreement which also states what should happen in the event of death of any of the three shareholders.
Each of the shareholders take out a Life Assurance plan to cover the value of their shares and places the plan into a business trust for the other 2 shareholders.
Sadly, Tony passes away, the policy he took out pays into the business trust for the benefit of David and Sally. David and Sally then follow the shareholder agreement and purchase Tony’s shares from his family which gives them a welcome financial boost and allows the business to continue with David and Sally as the owners
Keyperson Protection
Keyperson cover helps protect a business if a key person dies, is terminally ill or suffers a critical illness.
Proceeds from the policy are paid directly to the business helping them to protect their profits or clear business debt to continue trading as normally as possible.
A keyperson is an employee whose role has a direct impact on the business profits such as the owner, salesperson or any employee with specialist skills.
Keyperson premiums are paid by the company. The tax treatment of the premiums for corporation tax purposes is subject to negotiation with the company’s tax office and may affect the taxation of any claim paid.
Keyperson Cover can help protect against the following business risks:
- Protect profits
- Recruitment costs
- Loss of profits whilst the business is disrupted
- Being unable to repay a loan
- Paying back a business overdraft
- Covering loaned money through a director's loan account
Case Study
David, Sally and Tony run a successful and profitable business. Each of the three has a core specialism and are crucial to the ongoing and future success of the business.
David is the Sales Director and he is responsible for the majority of orders that are received into the business and without these orders the income and short-term viability of the business would be in danger.
The average gross profit over the past 3 years for the business has been £400,000 and the company accountant estimates that 60% of the profit of the firm is down to David. To provide Financial security to the business a plan is established on each of the 3 lives.
The basis for the plan was to cover 2 X Gross profit and apportion that per director so it was 20% each for Sally and Tony and 60% for David.
The company took out Life and Critical Illness plans for each of the three directors covering Sally and Tony for £160,000 each and David for £480,000.
How can we help?
We will:
- Work with you to understand your objectives, the level of cover required and type of cover you need.
- Conduct market research to obtain the best price for you and make a recommendation of the most suitable provider for you.
- Produce a report setting out our understanding of your objectives, technical information, market research findings and recommendations.
- Assist you through the set-up and underwriting processes and ensure the policy is correctly established.
- In the unfortunate event of a claim being made, we can assist the company with the claims procedure.
To discuss the needs of your business for shareholder or keyman arrangements please contact your usual LEBC consultant or email enquires@lebc-group.com or call 0800 055 6585.
Kay Ingram
Director of Public Policy
Please remember, no news or research item is a recommendation or advice to buy. LEBC Group Ltd is not responsible for accuracy and may not share the author’s views. The contents of this blog are for information purposes only and do not constitute individual advice. All information is based on our current understanding of taxation legislation and regulations. The Financial Conduct Authority does not regulate estate planning, tax advice, wills or trusts.
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