Do I Need Level or Decreasing Business Loan Insurance?
Question asked by Mr F Perkins
I’m looking into getting Shareholder Protection for my company so the other shareholders and I, as well as the business, will be covered should one of us pass away. However, I’m seeing a lot of information about whether or not Shareholder Protection Insurance is a benefit in kind.
So is Shareholder Insurance a P11D benefit?
Shareholder Protection pays out if a shareholder dies. This ensures the remaining shareholders or the business have the funds to buy back a deceased shareholder’s shares.
However, it’s a complex policy. Whether or not HMRC considers it a benefit in kind depends on how you choose to set up the cover. You can do this in three ways:
In each case, HMRC treats premiums different from a benefit in kind standpoint.
Furthermore, which option is right for your business will depend on your circumstances. Discuss this with your adviser and your accountant to be sure you’re choosing the best solution for your company.
This is the simplest option. Each individual shareholder pays for the insurance personally, from post-tax income.
However, this option is only really possible where there are no more than two or potentially three shareholders. Otherwise, the sheer number of plans this arrangement creates can rapidly get out of hand.
For instance, a company with five shareholders would require each individual to hold four policies for the other shareholders.
Given that each shareholder pays for life of another Shareholder Protection individually, from their own funds, this usually has no impact on the business (as the company doesn’t pay).
Such premiums are therefore not typically considered a P11D Benefit in Kind.
Company share purchase Shareholder Protection sees the company take out a policy on the life of each shareholder.
Should a shareholder die or become critically ill, the business receives the benefit. It can then buy and cancel the absent shareholder’s shares. The result is that the proportionate shareholding of the remaining shareholders effectively increases.
HMRC does not usually consider company share purchase Shareholder Insurance to be a P11D Benefit in Kind.
Here, each shareholder takes out a plan on their own life for the value of their shares. They then write this policy into a business trust for their fellow shareholders.
Either the business can pay for such a policy or the shareholders can pay themselves.
The most common route for this option is to have the company pay.
In this case, the company is typically able to deduct premiums as a business expense for corporation tax. However, shareholders generally have to pay tax on the premiums, as these would be a P11D or benefit in kind.
If each shareholder pays individually, then they pay premiums from post-tax income and there aren’t usually any further tax implications for individuals.
Regardless of who pays, as the payout goes into a trust, there generally aren’t tax implications for the business on the payout, also.