What would you do in the event that one of your shareholders were to become ill?
59% of businesses would cease trading within 12 months if they lost a key person
According to a Legal & General Report
If one of your fellow shareholders were to die, become terminally or critically ill, would you be able to buy their shares?
Or would you be happy for their beneficiary running the business with you?
What is the impact of losing a business owner?
The loss of a business owner can destabilise a business and can result in financial difficulties for other shareholders. On top of losing a business partner, whoever their shares go to, might be a person who may have no idea about the business however might wish to get involved in the business and start suggesting new ideas (that other shareholders may disagree with).
Additionally, they might sell their shares to someone else who you may not wish to run a business with.
How does a shareholder protection policy work?
Shareholder protection gives the surviving shareholders the opportunity to stay in control of their business by providing the cash to buy out another shareholder if they die or suffer from a terminal or critical illness.
To set up shareholder protection, each shareholder takes out their own life cover with a sum assured equivalent to the value of their shares. This policy must be put into a trust with their co-shareholders as beneficiaries
From there, all the shareholders will enter into an agreement whereby if one of the shareholders suffers a critical illness or dies, the other would use the proceeds of the claim on their policy to purchase their shares from their personal representatives if they die, or directly from the shareholder should they suffer a critical illness.
What happens if a new shareholder joins the business?
Any new shareholders joining the business should enter into the shareholder protection plan. The insurance, trust documentation and option agreement should be set up to match any existing shareholder protection agreements.
This would be an opportunity for existing shareholders to review their protection arrangements and where appropriate, make any relevant adjustments to their current cover. As well as ensuring all trust documentation and option agreements are up to date.
What happens if a shareholder leaves the business?
If a shareholder was to leave the business, the shareholder protection will no longer be needed by that person. This life insurance cover on their own life would go back under the terms of the business trust into a personal insurance policy for the benefit of the departing shareholder.
The cover could be put into a new personal trust to help the leaving shareholder’s dependents mitigate against Inheritance Tax.
Are there any tax implications for shareholder protection?
If the company pays the premium on behalf of the shareholder, it can deduct this payment as a business expense for corporation tax purposes. The company may also incur a liability for National Insurance contributions paid on behalf of the shareholder, but this may also be a deductible expense. Also, the premium payments will be assessed as a benefit to the shareholder for Income Tax and National Insurance purposes.
If the individual shareholder pays the premiums, this will be deducted from their taxed income.