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Protect The Shares In Your Business

Shareholder Protection Insurance

In the event of the death of a shareholder the shares that they previously owned could be inherited by another family member, making this person you may never have met, a key shareholder in the decision making of your business. This is a very common risk that can be eliminated by using a simple shareholder protection policy.

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The Main Features Of Shareholder Protection Insurance?
  • Ensure the surviving shareholders maintain control of the business
  • Essential funding to allow the shares of the deceased to be bought back
  • Vital income for the deceased shareholder's family
  • A solid agreement that ensures all business partners are protected
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Plan For The Future

What's is Shareholder Protection?

Shareholder protection insurance is specifically designed for small - to medium-size SMEs and helps soothe the issues with succession planning when a business partner dies.

Shares in a business usually come with voting rights, which means the shareholders are in control of the business and are usually made up of the key people involved in a company or venture.

Should one of these business partners die, these voting rights and, in some cases, control will pass to the deceased's family and may mean that the surviving business owners lose control of the company.

Shareholder protection cover removes this risk. In the event of the death of the insured person, the shareholder protection insurance pays a tax-free lump sum to either the company or the surviving shareholders, who in turn use the funds to purchase the shares from the beneficiaries of the deceased at a pre-agreed market value.

The outcome is that the deceased's family is bought out of the business at fair market value, and the remaining business owners receive the shares and voting rights or control that come with them.

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Protection When You Need It Most

Benefits of shareholder protection cover?

As a business owner, you make decisions that you take for granted all the time. Opening bank accounts, making financial transfers, and even agreeing to new business terms usually require the approval of the business owner. 

If that business owner dies and the shares are left to his spouse, all of these essential day-to-day decisions might need their approval and, based on their understanding of the business, could be problematic.

If your business relies on the income other shareholders generate and they were to die, there would be a drop in revenue, and this might affect the remaining shareholders.

In order for the business to recover, the remaining shareholders might need to replace the deceased shareholder, which may also require offering them some equity. If the deceased shareholders' family still own the shares, this may also be difficult.

A carefully thought-out shareholder protection policy would solve both of these potential issues and provide a positive financial outcome for all involved at a time that would be very difficult.

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Ensure The Smooth Running Of Your Business

Who pays the premium for shareholder protection?

There are multiple ways to set up shareholder protection insurance and different tax treatments for each. In all ways, the premiums are paid for by the business; however, it is important to make note of the tax efficiency of each policy.

Below, you will find details of both Shareholder buyback and Company buyback, which are the primary forms of shareholder protection insurance.

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Details Of The Policy

Shareholder Buyback Insurance

This policy is paid for by the business and insures the life of each shareholder subject to their stake in the business. In the event of the shareholder's death, the lump sum assured is paid tax-free to the surviving shareholders. A cross-option agreement then commits the shareholders to buy the shares back from the deceased's estate.

The business can pay the premiums, but there will still be a benefit in kind (BIK) charge payable by each shareholder subject to the value of the premiums paid for their policy. Any benefit paid would be tax-free and left in a trust as the beneficiary is not the company. HMRC won't grant corporation tax relief on the premiums paid.

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Tailor-Made Policies

Company buyback insurance

This policy is paid for by the business and insures the life of each shareholder based on the value of their share in the business. In the event of the death of a shareholder, the benefit is paid directly to the company tax-free. The company then commits to buying back the shares from the deceased's estate.

The business pays the premiums, and there is no benefit in kind (BIK) charge for the lives assured. As any benefit received by the company would be tax-free, HMRC won't allow corporation tax relief on the value of the premiums.

Company share buyback has some specific limitations that need to be assessed before choosing this option. Questions like the level of retained profits, how long the company has been trading, details of the company's articles of association, and any shareholder agreement will need careful attention.

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The mechanics of shareholder protection insurance

How does a shareholder protection policy work?

Business owners take out a life policy on each shareholder, and in the event of their death, the policy either pays the company or the surviving business owners to allow them to buy back the shares of the deceased from the deceased shareholder's family.

Business partners enter into a shareholder protection arrangement that includes a double option agreement, which sets out the rules and processes that will be followed in the event of a death. Shareholder protection is a type of business protection insurance that can be very valuable to shareholders and other business owners.

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Inheritance tax free lump sum

What trust is used for shareholder protection?

A business trust will be created to receive the lump sum that would be paid. This business trust will help the beneficiaries avoid paying inheritance taxes on the lump sum that will then be used to buy back the shares from the family of the deceased.

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Placing a value the shares

How do you value a business for shareholder protection?

Every sector is valued differently. Some are a multiple of profit, some turnover, some a valuation of goodwill or future potential. Whichever matrix your industry uses, it needs to be a reliable one that is in line with industry standards.

Shareholders' equity will need to be taken into account along with net profit, future profits, the company's balance sheet, existing shareholders, shareholder agreement, minority shareholders, any binding contract, and any buy and sell agreement that might be in place.

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Is there tax to pay for the family

Does the deceased's family pay capital gains tax on the share buyback?

If the company has been owed by the deceased shareholder for more than two years and the business is trading, the shares should qualify for business property relief (BPR). Business property relief is now simply known as (BR) for business relief and is intended to ensure that a family business can survive as a trading entity without the need to be sold or broken up due to an inheritance tax bill that the family estate couldn't pay.

If business property relief doesn't apply, the family may still be eligible for entrepreneur relief or business asset disposal relief, which would mean a reduced tax of just 10% would be charged.

All of these things need to be carefully considered before setting up a policy, which is why we recommend taking independent financial advice or qualified insurance professionals who can help find the most cost-effective premiums.

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Shareholder protection and critical illness

Can shareholder protection include critical illness cover?

Shareholder protection insurance is similar to key person insurance and is a form of business insurance; therefore, critical illness cover can be added. 

It is possible to add critical illness cover at the application stage. However, the shareholder protection insurance cost will be higher as critical illness coverage is much more expensive than stand-alone life insurance.

Usually, terminal illness cover is included in a standard death-only policy, and it is important to note the difference between critical or terminal illness in shareholder protection.

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Add on benefits to shareholder protection

Should I add the critical illness benefit to my shareholder protection insurance?

Critical illness needs to be carefully thought out when used in shareholder insurance, as the qualifying conditions that are defined as critical illness are broad. Some, for example, those who have lost sight in one eye, would be deemed critically ill shareholders and would trigger the policy and the cross-option agreement. However, the key shareholder may not wish to sell their shares or exit the private limited company.

Other critical illnesses can be recoverable, such as cancer and the previously critically ill; surviving shareholders may wish to return to the business once fully recovered.

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Shareholder protection vs Relevant life

What is the difference between relevant life insurance and shareholder insurance?

Relevant life insurance is intended to benefit the family of the deceased directly by paying a tax-free lump sum to the family in the event of the death of the life insured. It has been cleared by HMRC as a tax-deductible expense as it provides a king of death in service benefit for SMEs. There is also no benefit in kind or P11D benefit applied.

Shareholder protection insurance is business insurance and does not have the same tax treatment. It is also intended to be paid to either the company or shareholder in the event of the death of a shareholder. Subject to the policy structure, it may also be counted as a benefit in kind that appears on the insured P11D.

Although some business owners may choose to use relevant life for shareholder protection, it is not recommended and may be challenged by HMRC if used in this way.

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Tax and shareholder protection insurance

Is shareholder protection a benefit in kind?

This depends on how the policy is set up. If the company chooses a company buyback policy, then the benefit would be paid to the company, and in this case, no benefit in kind would be charged. Suppose a shareholder buyback policy is used, then yes, a p11d benefit will affect the income tax paid by the life assured. This is because they will receive a personal benefit from the arrangement.

Strictly from a tax perspective, company share buyback is more tax efficient. However, there are more things to consider to ensure the mechanism works smoothly, so always consult an independent insurance broker such as ourselves.

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Get the essential protection you need

Why should shareholders be protected?

If a shareholder dies, the surviving shareholders would usually wish to buy back the shares, so having a cash lump sum from shareholder protection policies would be very helpful. This would allow the surviving shareholders to buy back the shares from a family member of the insured person. Therefore, shareholder protection insurance provides an essential kind of business protection that can also be essential to the insured person's beneficiaries. 

It is unusual for the surviving shareholders' family members to want to take a full-time role in the business, so using a cash lump sum to buy them out is a win-win for all parties.

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Essential protection

How can shareholders protect themselves?

In our experience, most director shareholders take out a range of protection policies. The first is usually relevant life insurance to provide essential cover for their families in the event of death. The second is executive income protection, which continues to pay them 80% of their salary if they are unable to work due to illness or sickness.

The final policy is usually shareholder protection insurance, which, as we have discussed, can provide an excellent succession plan in the event of the death of an employee.

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Shareholder insurance rights

What are the rights of shareholders?

Each shareholder insured will have the ability to amend or cancel their policy at any point. The business is the beneficial owner, so other directors also have the ability to change or alter the policy. We usually advise that any amendments are done so in a general meeting, and the minutes are clearly noted to show any change that has been agreed.

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How much cover do you need?

What value should be covered by share protection insurance?

How much cover might be needed is a great question. We usually recommend shareholder protection insurance to the value of the shares each shareholder owns. For example, if you are a 20% shareholder of a £1 million company, you would require cover for £200,000.

We will contact you each year to assess the value of the company as you may need to increase cover in the future. If this were the case, some insurers would simply increase your current policy; however, it might be more cost-effective to take out a top-up policy to make up the extra value. Our team would naturally assess the best option for you before you decide which option you prefer.

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Tax efficient protection

Is shareholder protection a P11D?

It really depends on the structure you choose. Using a company share buyback policy will mean no benefit in kind or P11D for the lives assured. Choosing a shareholder buyback policy will mean a benefit in kind will be declared on the P11D, making this the less tax-efficient option.

A company should take independent financial advice or consult a business protection expert before choosing the best policy.

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Insurance and shareholders agreement

Does my shareholder's agreement conflict with shareholder protection?

It is essential to take a look at any shareholder's agreement prior to taking out a policy, as there may be limitations to how the share buyback process needs to work. A shareholders agreement sets out the rules that shareholders abide by, and these may detail the process of a company share purchase or the company's cover requirements before a transaction can take place and may need to be amended prior to taking out shareholder protection insurance.

The insurance provider won't check this for you, so take care to use a professional when creating your policy. 

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Does it offer value

Is shareholder protection insurance worth it?

Absolutely! In the event that the company needs to use the policy, all parties will be glad they set one up. The surviving business owners will keep control of the business, and the family of the deceased will receive fair market value for the shares they have inherited. Usually, the family of the deceased have little or no interest in the company and is happy to be able to sell the shares.

As the premiums are paid for by the business, they are usually cost-effective, and also, as death-only policies can be quite affordable, they don't need to break the bank either.

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The legals

What is a cross option agreement

A cross-option agreement is a buy-and-sell agreement that can also be referred to as a double-option agreement and is a contract between the shareholder or the shareholders and the company. It is similar to a shareholder agreement in that it ties all business partners and fellow shareholders to a plan that will be actioned if a shareholder dies.

The cross-option agreement agrees on the valuation matrix to be used, who will buy the shares, what will happen to the shares and how the process will be executed. It is a legally binding agreement that secures the process for both surviving business owners and the family of the deceased. 

It is important to check the articles of association to ensure that a cross-option agreement can be used. Each business partner should be aware of the rules prior to agreeing to the correct structure. 

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IHT and insurance

Is there an inheritance tax to pay on shareholder protection insurance?

Inheritance tax isn't payable for shareholder protection as the company is usually the beneficiary. If the remaining shareholders are the beneficiaries, the benefit is left in a trust, resulting in no inheritance tax to pay.

Other Broker Services

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Key Man Insurance Cover

A key person policy pays the business a lump sum when a key person who works for that business suffers a specified critical illness or dies. It's a simple term assurance policy that protects the business against losing a key person.

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Executive Income Protection

Executive income protection is a tax-efficient policy that pays 80% of your monthly income to the business if you are unable to work due to sickness or ill health, until you return to work.

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Private Business Health Insurance

Private business health insurance can be paid for by your company as an expense and can also be extended to include your family. Corporation tax relief is available, however, a benefit in kind tax will be due on the value of the business health insurance premiums. This is usually more tax efficient than paying for the premiums personally.

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Relevant Life Insurance

Relevant life insurance is the only life insurance policy that is an allowable business expense and, therefore, provides your company with corporation tax relief and essential life insurance for company directors and even employees.

It is a kind of death-in-service benefit where a lump sum benefit is paid to the family of the insured in the event of the death of the person covered. There is no inheritance tax to pay as the relevant life policy will be left into a relevant life plan trust, which may take the form of a discretionary trust.

Company Life Insurance

Company Life Insurance

As a business owner, you will no doubt be trying to find out the kind of company life insurance that is available and, more to the point, which ones provide income and corporation tax relief.

If that's you, then below you will find an introduction to the various policies you should consider along with information on how this company life cover can protect not only your business but also you and your staff personally.

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Ready to start getting cheaper business life insurance premiums? Contact our team of dedicated life insurance advisors and wealth managers today to arrange your free consultation.

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