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Is your business protected against the unexpected?

26 January 2023
Christie Inns
Structuring a Business, Building a Business

As you will all well know, running a business is very time consuming. So much so that it can be quite easy to become wrapped up in the ‘now’, without giving much thought to the future of the business and what could happen in the unfortunate event of death or illness.

Ensuring you have a contingency plan in place if adversity were to strike is often critical –  not only to ensure the smooth running of the business continues, but also to protect your loved ones and fellow business partners. Check out a previous blog we wrote about why shareholder agreements are so important.

What is Shareholders Protection Insurance?

Shareholders Protection Insurance allows business owners to buy back shares from a fellow shareholder who is diagnosed with a critical illness or passes away. Life insurance policies are taken out to cover all participating shareholders, which would pay out on the event of illness or death, allowing remaining business owners to purchase the shares from the critically ill shareholder, or their family in the case of a death.

This not only ensures control is retained by the remaining shareholders which minimises business disruption, but it also means that either the terminally ill shareholder, or their family are financially supported in difficult times. If a shareholder dies without protection in place, their shares could be inherited by an undesirable beneficiary or could end up being sold to a rival.

How Does it Work in Practice?

As with all insurance policies there is no ‘one size fit all’ solution for companies. Shareholder Protection Insurance can be set up to accommodate a variety of circumstances and provides the flexibility to adjust to changing financial needs and scenarios. Just because one shareholder may be ‘uninsurable’ for any reason (perhaps they have significant health issues) this does not prevent policies being put in place for all other shareholders, with separate protection being considered for the ‘uninsurable’ individual.

Are There Any Tax Implications?

Depending on the type of plan taken out any insurance payout could either be to the company or to the surviving shareholders. The good news is that this lump sum payout won’t be taxable for the company as it is for capital reasons.

If shares are bought back on death, then they would be revalued in the estate which usually mitigates any capital gains. If shares are bought back on critical illness, then a gain may arise on which the shareholder would claim Business Asset Disposal Relief and pay 10% tax on gains over the annual exempt amount (£12,300 for 2022/23). If the plan is a company plan, then the company can pay the premiums with no implications for the shareholders.

If the plan is a personal plan, then the company can pay for the premiums, but this would give rise to a taxable benefit for the shareholder reportable on a P11D.

More Information

If you would like to find out more about shareholder agreements and/or Shareholder’s Protection Insurance then please speak to your accountant or financial advisor.

If you are a client of Friend & Grant or thinking of changing accountants then please contact Mark Friend by email or on 01634 731390. You may also be interested in reading our previous blog Is your family protected? to discover other ways you can ensure you’re protected against the worst.

Our services

If you would like to find out more about some of our services that might help you please take a look at our related pages:

Building a business

Structuring a Business

Blogs related to Business Protection

Take a look at our other blogs on the topic of business protection

Friend & Grant Wealth Management Ltd for Independent Financial Advisors

Is your Family Protected?

The content in this blog is correct as at 26th January 2023 See terms and conditions.

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