What is Shareholder Protection? Do we need it? How much does it cost?

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Shareholder Protection Insurance protects a business and its shareholders by making succession planning as smooth as possible should a company shareholder die or become critically ill.

  • It provides the necessary capital for the remaining shareholder(s) to buy the deceased’s share of the business.
  • The business can continue trading as normal whilst the deceased shareholder’s family can realise the value of their business interest.
  • More than half of businesses had no formal agreement to establish what would happen if a business owner died (Legal & General).

What Does Shareholder Protection Cover?

Should an insured individual die or suffer a terminal illness (diagnosed with less than 12 months to live) a shareholder protection policy would pay out a lump sum to the other shareholder(s).

Adding Critical Illness Cover

Adding Critical Illness Cover enables the plan to pay out if the shareholder were to suffer a serious illness. The three most common claims are for:

  • Cancer
  • Heart attack
  • Stroke.

In addition to the ‘big three’ conditions, Critical Illness Insurance covers typically anywhere between around 10 to more than 100 serious illnesses including conditions such as Multiple Sclerosis and Motor Neurone Disease.

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Why Shareholder Protection Insurance?

According to research from Legal & General…

  • 53% of businesses would cease trading in under a year if a key person died or became critically ill
  • Over half of businesses had no formal agreement to establish what would happen in the event of the death or critical illness of a business owner
  • 60% of businesses had not reviewed their company agreements in the last year.

If a business partner dies without making specific provisions for their share of the business their interest in the company will likely pass to their estate. The family then has two alternatives:

  • A member of the family could take over the deceased’s position as a partner
  • The family could realise the value of the business interest by selling it.

Neither of these avenues is problem-free.

Losing control of the business

If a member of the family takes over the deceased’s position as a business shareholder there is no guarantee that they will be able to make any contribution to the business. In fact, in some cases their presence could even be detrimental to the company.

Sleeping partner

A sleeping partner who is not involved but is entitled to a share of the profits may be a huge burden to the remaining partners. Also the family may be unhappy if it turns out they’re in a position where they have no effective control over the profits of a business which they may be relying on for income.

Selling to an unwelcome party

If the interest is sold the remaining partners may find themselves working with an unwelcome new partner. Or indeed there may be no natural buyers, in which case financial problems may surface not only for the family but also for the business.

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).

5 Year Policy
10 Year Policy
15 Year Policy
Premium Calculator: Life Insurance Only
Age 35
Age 45
Age 55
Premium Calculator: Life & Critical Illness Cover
Age 35
Age 45
Age 55
Premiums calculated on February 8th, 2019

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.

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Common Shareholder Protection Questions

  • How do I value my company for Shareholder Protection?

    Valuing a company for any reason, including Shareholder Protection, can be tricky and will very much depend on a variety of different factors. There’s no tried and tested method of valuing a business, as each business is different even within the same industry.

    However, some of the common factors an adviser will look at when helping you value your business for Shareholder Protection Insurance include:

    • Analysis of the company’s cashflow
    • Analysis of the company’s profits, i.e. whether they’re static or increasing
    • For companies with a solid, longstanding financial history, multiples of net profit plus cash in bank and assets can be a good method of valuing the business, but this is tricky for startups and newer companies
    • Different industries will often command different values, even if underlying business metrics are similar
    • Intangible factors will also play a part, such as the company’s reputation and relationship with clients.
  • What happens with no Shareholder Protection?

    If a director or business partner dies, then without initial planning and consideration the surviving directors could run the risk of the shares passing to someone with no interest in the company or even being sold to a competitor.

    A protection policy taken out on the relevant shareholder could ensure the surviving business owners have both the right and the financial means to buy the absent partner’s share of the business from his or her estate (or the shareholder themselves, if they’re critically ill).

    In the event of death, business protection ensures difficult questions are avoided and the beneficiaries of the deceased’s estate can realise the value of their share of the business.

  • Is Shareholder Protection Insurance tax deductible?

    In most cases the individual shareholder will be liable for income tax and National Insurance on the value of the premiums which are being paid.

    Should a claim arise the lump sum payment is usually paid out tax-free so there is no need to gross up the level of cover.

  • What is a cross option agreement?

    A Cross-Option Agreement is set-up alongside Shareholder Protection which on death provides the option for the other shareholders to buy the shares (‘Call’ option) and the option for the deceased’s family to sell (‘Put’ Option).

    Should the shareholder suffer a serious illness only a ‘Put’ option exists, giving the shareholder who has suffered the critical illness the option to sell their shares to the other business owners but not the right for the business to buy the shares. This protects a shareholder absent through illness from being forced out of the company.

    It’s essential that the company’s articles of association give both parties the option to buy / sell the shares rather than an obligation. An obligation to sell the shares could result in an inheritance tax bill as this may disqualify the shares from business property relief (BPR).

    There are two types of option agreements you would use for Shareholder Protection.

    • Double Option Agreement
      Also known as a cross option agreement, whereby the outgoing and remaining shareholders both have the option to buy / sell but where one party wishes the sale to go ahead the other must comply.
    • Single Option Agreement
      This is used when Critical Illness Cover is included in the policy. It still gives the insured (i.e. critically ill) shareholder the option to sell their shares but doesn’t give the remaining shareholders the automatic right to buy the shares. This protects the critically ill shareholder from being forced out of the business during their absence.
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Other Types of Business Protection

Shareholder Protection covers shareholders and their families by ensuring there are ready funds available to repurchase the shares of a deceased or critically ill shareholder. This protects the other shareholders, who may face losing control of the business if they don’t have the funds to buy back the absent shareholder’s shares, and the shareholder / their family, who are able to realise the cash value of their shares.

However, there are other types of business protection that can work alongside business protection, such as:

Keyman Insurance

Keyman Insurance protects the future of your business by supplying a cash injection into the company if a key person dies or becomes critically ill. These funds can be used for a variety of purposes, including:

  • Providing a buffer against loss of profits
  • Paying for recruitment and training of a replacement
  • Repaying outstanding loans
  • Loss of important personal or business contacts
  • Loss of confidence from suppliers and customers
  • Difficulties in raising finance for new developments
  • Loss of detailed knowledge of the business’ processes and systems
  • Winding down a company in an orderly fashion.

How would your business cope without a key individual the business relies on for its continued success?
53% of businesses stated they would fold in less than a year if one of their key workers died or suffered a serious illness according to Legal & General — could your business manage or would it simply collapse?

Business Loan Insurance

Business Loan Insurance is arranged in step with any outstanding corporate debt the company has, e.g. company overdrafts, commercial loans, venture capital funding and commercial mortgages etc. It pays out to cover these debts should an individual key to their repayment become critically ill or passes away.

Business Loan Insurance is typically set up as decreasing cover, so it falls alongside a declining debt as that debt is repaid, eventually reaching zero along with the outstanding debt at the end of the policy term.

Relevant Life Insurance

Relevant Life Insurance offers you personal Life Insurance but paid for by your limited company. Many of our company director clients opt for Relevant Life Insurance because it can be much more cost-effective than paying for premiums personally. This is because of the tax relief available on premiums paid for via your limited company. For a demonstration of how you can save almost 50% on Life Insurance premiums with a Relevant Life policy, ask your adviser today.

Thanks to the trust set up at the time you buy the policy, there’s no inheritance tax or corporation tax to be concerned with on the payout because the money doesn’t go into the deceased’s estate or back into the business in the event of a claim.

Shareholder Protection Quotes & Expert Advice

When there are multiple people with different holdings and various ways of structuring the protection it can start to get complicated quite quickly.

We have a team of business protection experts who are on hand to make sure you cover is set-up correctly with the most competitive terms.

Why Speak to Us?

We started Drewberry because we were tired of being treated like a number and not getting the service we all deserve when it comes to things as important as protecting our health and our finances. Below are just a few reasons why it makes sense to talk to us.

  • There is no fee for our service
  • We are independent and impartial
    Drewberry isn’t tied to any insurance company, so we can provide completely impartial advice to make sure you get the most appropriate policy based solely on your needs.
  • We’ve got bargaining power on our side
    This allows us to negotiate better premiums for you than you going direct yourself.
  • You’ll speak to a dedicated expert from start to finish
    You will speak to a named expert with a direct telephone and email. No more automated machines and no more being sent from pillar to post – you’ll have someone to speak to who knows you.
  • Benefit from our 5-star service
    We pride ourselves on providing a 5-star service, as can be seen from our 2748 and growing independent client reviews rating us at 4.92 / 5.
  • Benefit from the protection of regulated advice
    You are protected. Where we provide a regulated advice service we are responsible for the policy we set-up for you. Doing it yourself or going direct to an insurer won’t provide this protection, so you won’t benefit from these securities.
  • Claims support when you need it the most
    You have support should you need to make a claim. The most important thing when it comes to insurance is that claims are paid and quickly. We are here to support you during the claims process and make sure it’s as smooth and stress free as possible.
Tom Conner Director at Drewberry

Like all Business Protection, Shareholder Protection is a complicated area that requires specialist advice.

If you need any help please don’t hesitate to pop us a call on 02074425880 today or email on help@drewberry.co.uk.

Tom Conner
Director at Drewberry

Great service assisting me obtain the right product. Would happily recommend Drewberry following their professional and efficient way of working.

Jonathan Chadwick
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