Guy Hilton DipPFS
- Financial Planner at Kreston Reeves Financial Planning Services Limited
- +44 (0)330 124 1399
- Email Guy[email protected]
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Being prepared for the unexpected is just one challenge of owning a business. Being able to ensure that all the hard work in setting up and running the business is not wasted if a shareholder should pass away or become critically ill, then there is one way the business can prepare for the unexpected.
Shareholder protection is a type of business protection insurance which pays out a lump sum if a shareholder dies or suffers a critical illness. Most policies are life assurance based, but critical illness cover can be added to the policy as an extra.
The premiums are usually paid for by the company and in the event of the death of a shareholder, the lump sum paid out is paid to the company to buy back the shares from the deceased shareholder’s estate.
The level of cover is determined by the value of the individual’s shareholding within the business.
On this basis, the premium is not treated as a business expense, but this does mean that there are not usually any tax implications for the shareholders.
There are two other ways in which ‘Share Protection’ can be structured, other than the example I have used, which is company share purchase. These are:
These options all have different tax rules, so it is important to seek advice on which option is best for you and your companies’ circumstances.
It is likely that single and double option agreements need to be put into place under these other two ways of structuring share protection. A single option agreement is only included if Critical Illness cover is selected on the policy. Under this agreement, the affected shareholder can agree to sell their stake in the business in the event of a critical illness.
A double option agreement creates a buy and sell option in the event of death. This means that if the remaining shareholders want to buy the shares or the deceased’s estate want to sell the shares then the other must oblige. If neither party wants to exercise this option, then the shares will pass to the beneficiaries of the deceased’s estate for them to do as they wish.
In this event on death of a shareholder, the insurance company will pay out the lump sum to the company. The company then uses this sum to pay the deceased’s estate in return for their shareholding in the business. This in turn means that the proportionate shareholding of the remaining shareholders increases, ensuring that the surviving shareholders can buy the shares and stay in control of the business and offers cash to the deceased’s estate for the family.
On the flipside, should a shareholder pass away and no protection is in place then one of two things can happen:
Whilst this may be acceptable in some businesses there are a few problems that could arise. The first one being do you or your other shareholders really want to be dealing with the others family? Especially if they have no interest in the business nor any skills to run it but they will be still entitled to a share of the profits.
Secondly, the family could sell the shares to anyone. This could be a competitor and could leave the remaining shareholders as minority shareholders under the control of a rival.
Research undertaken by L&G in 2018 showed the following in the event that a shareholder died:
Ask yourself do you and your Partners really want to run the risk of the family or another person outside the business taking control? If not, then it is vital that you seek professional advice on your most suitable option.
To discuss the most appropriate options for your particular circumstances, or to review an existing policy please contact our Financial Planning team on +44 (0)1227 768231 or provide your details on our online enquiry form.
The content of this article is for information only and does not constitute formal financial advice. This material is for general information only and does not constitute investment, tax, legal or other forms of advice.
You should not rely on this information to make, or refrain from making any decisions. Always obtain independent, professional advice for your own particular situation.
Kreston Reeves Financial Planning Limited, Independent Financial Advisers. Authorised and regulated by the Financial Conduct Authority.
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