Shareholder Protection Insurance protects a business and its shareholders. It offers cash to buy an absent shareholder’s shares should a shareholder die or become critically ill.
This allows the business to continue trading as normal should the worst happen to a shareholder. It also allows the remaining shareholders to keep control of the business.
Otherwise, the business runs the risk of shares being held by a non-contributing partner or even being sold to a competitor.
Meanwhile, Shareholder Protection also allows the absent shareholder or their family to monetise their shares easily if a shareholder becomes critically ill or dies.
Of the three ways to set up Shareholder Protection, only two are really viable where there are more than two shareholders:
Here, each individual shareholder takes out an insurance policy on their own life. You then write this into trust for the benefit of the business.
On the death of a shareholder, the policy pays out into a business-owned trust. From there, the shareholders use the funds to buy the deceased or critically ill shareholder’s shares.
There are two ways to pay for own life under business trust Shareholder Protection: Each shareholder can pay for it personally or the business can pay for it.
HMRC taxes Shareholder Insurance differently depending on how you take it out.
For own life under business trust, the most common route is to have the company pay for it. In this instance, the company is typically able to deduct premiums as a business expense against corporation tax. However, the shareholders would generally have to pay tax on the premiums, as these would be a P11D or benefit in kind.
If each shareholder pays individually, which is much less common, then each shareholder pays premiums from post-tax income. This means there aren’t usually any further tax concerns for the individuals.
With company share purchase Shareholder Protection, the company takes out a policy on the life of each individual shareholder.
In the event of death or critical illness of a shareholder, the insurer pays the benefit to the business. This provides the company with the necessary funds to buy out and cancel the absent shareholder’s shares. The result is that the proportionate shareholding of the remaining shareholders effectively increases.
The company both owns and pays for the policy and is the ultimate beneficiary.
HMRC typically treats the payout as free from corporation tax as a capital receipt, but this depends on your accountant, your local inspectorate of taxes and your legal representatives.
However, premiums will not generally be a deductible expense for corporation tax purposes. There is also typically no need for a trust.
Moreover, as the company owns and pays for the policy and is the ultimate beneficiary, HMRC does not typically class this method as a benefit in kind for the shareholders.
The company share purchase route requires the shareholders and the company to enter a cross option agreement. This lays out the terms of the share purchase, such as options to buy and sell the shares and how the shares will be valued.
For tax reasons, at the time you establish the cross option agreement there will be no guarantee that the company will be in a position to purchase the shares.
You’ll typically draft the agreement to accommodate this. For example, the company will have the option to purchase the shares and the shareholder (or their estate) the option to sell the shares. This will generally preserves business property relief for inheritance tax purposes on the shares.
Under the Companies Act 2006, you must meet the following requirements to allow a share buyback to continue:
Shareholder Protection is complicated, and company share purchase is the most complex of all your available options. We recommend seeking not just financial advice but also advice from your accountant and legal representative(s) before taking out such a policy.
Shareholder Protection isn’t simple. It needs carefully-structured advice from a variety of parties to ensure you get it right. It’s therefore best to start your journey by speaking to an expert adviser.
Fortunately, the team here at Drewberry have placed millions of pounds of Shareholder Protection risk over the years and are more than happy to assist you in this area.
We started Drewberry™ because we were tired of being treated like a number.
We all deserve a first class service when it comes to things as important as protecting our companies and our finances. Below are just a few reasons why it makes sense to talk to us:
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I had a great experience with Drewberry, they have a lot of knowledge and expertise with life insurance and income protection and were able to advise me and arrange suitable products. Highly recommend.