How Much Does Shareholder Protection Cost?
The below table provides calculations for the monthly cost of Shareholders Insurance split into Life Insurance and Life Insurance with Critical Illness Cover for a healthy non-smoking individual aged 35, 45 and 55.
They’re looking for £150,000 of level cover (i.e. cover that will remain fixed throughout the policy term).
What is Premium Equalisation?
When calculating Shareholder Protection premiums, you may need to equalise them between all the parties involved in the agreement if you’re taking out the policy on an own life under business trust basis and the individuals are paying for their cover themselves.
When a policy is written on this basis, if the shareholder dies or becomes critically ill, the policy pays out into the trust. This gives the remaining shareholders the financial capacity to buy the deceased’s shares from their estate, or from the shareholder themselves if the shareholder is critically ill.
Premium equalisation is important here because each individual will have premiums of a different value given their age and state of health. However, a quirk in inheritance tax rules means unequal premiums could be seen as a transfer of value or gift from the shareholder(s) paying the most to those paying the least, which could potentially fall under the remit of inheritance tax on death.
To avoid this, you should calculate Shareholder Protection premiums so that they’re equalised or ask your adviser for assistance.
How is Shareholder Protection Insurance Taxed?
The taxation of Shareholder Protection Insurance depends on a variety of factors. Premiums and the payout may be subject to a range of taxes depending on the individual circumstances of you and your company, so it’s always best to seek specialist advice.
Where the individual pays the premiums themselves the premiums are paid from post-tax income and no tax relief is usually available. The benefit is written into trust for the benefit of the other shareholders, and in the most part protecting the payout from inheritance tax.
As always when it comes to trusts and tax law, it’s best to consult with your solicitor and accountant before putting anything in place that may open you up to a tax liability later on.
Taxation of a own life policy under a business trust…
Where the company pays the premiums on behalf of the shareholder on an own life basis which is set up under business trust, the company is typically able to deduct this payment as a business expense for corporation tax purposes.
However, the shareholders would have to pay tax on the premiums, as these would be a P11D or benefit in kind.
Taxation of a company share purchase arrangement…
Where the premiums are paid under a company share purchase arrangement, these premiums are not typically considered a business expense as they wouldn’t meet the ‘wholly and exclusively for the purposes of trade’ rule, given that the policy isn’t designed to meet loss of profits when the outgoing shareholder dies or becomes critically ill.
As the company owns the policy and makes the policy payments, as well as receives the benefits, there aren’t usually tax implications for the shareholders.