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Shareholder Protection Premium Equalisation

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What is Shareholder Protection?

Shareholder Protection Insurance is a way to protect your business by ensuring there are sufficient funds available on the death or critical illness of a shareholding individual for the remaining shareholders to buy a deceased or critically ill shareholder’s shares.

Shareholder Protection can also act as insurance for the absent shareholding individual / their family as it allows for easy monetisation of their shares should they be too ill to work or, alternatively, provides funds for their family if they were to pass away.

Victoria Slade Independent Protection Expert at Drewberry

Shareholder Protection is complicated – this extends to how it’s paid for and how it might be taxed.

There are different ways to pay for Shareholder Protection, one of which involves each shareholder paying for their own premiums. It’s here the important of premium equalisation comes in.

Victoria Slade
Business Protection Expert at Drewberry

Premium Equalisation Explained

One option to set up Shareholder Protection is own life under business trust.

There are two options to pay for this:

  • Through the business from a company account, with the premiums being a taxable P11D benefit in kind for the shareholders
  • Have the shareholders pay for it individually themselves.

In most instances the company will pay for the premiums, but where the individual pays for the premiums each individual shareholder takes out a policy on their own life written into a trust for the benefit of the other shareholders (i.e. the business).

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.

Each individual takes out a policy based on the proportionate value of their equity within the business. So someone owning 50% of a £1 million company would take out a policy for £500,000.

Of course, there are other factors at play which will impact the cost of premiums, most notably the age and state of health of each shareholder.

Where individuals pay for the premiums themselves, it’s essential that premiums are equalised to prevent any potential tax implications.

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.

Premium Equalisation Calculator

Imagine a company worth £1 million owned by Jane, Kate and Lucy. They want Shareholder Protection until they’re 65, when they anticipate retiring.

Jane is 50 and the majority shareholder

  • She owns 51% of the company – her shares are worth £510,000
  • Jane takes out a 15 year policy for £792 per year
  • This policy is written into trust for the benefit of Kate and Lucy

Kate is 40 and a minority shareholder

  • She owns 30% of the company – her shares are worth £300,000
  • Kate takes out a 25 year policy for £275 per year
  • This policy is written into trust for the benefit of Jane and Lucy

Lucy is 35 and a minority shareholder

  • She owns 19% of the company – her shares are worth £190,000
  • Lucy takes out a 30 year policy for £147 per year
  • This policy is written into trust for the benefit of Jane and Kate

Total premiums for the three directors come to £1,214 per year. However, there is a specific formula to equalise these Shareholder Protection premiums laid out below.

What Jane Should Pay

Jane’s share in the business (£510,000) multiplied by Kate’s policy payments (£275)


Total value of the business (£1 million) minus Kate’s share of the business (£300,000)

 

+

Jane’s share of the business (£510,000) multiplied by Jane’s policy payments (£147)


Total value of the business (£1 million) minus Jane’s share of the business (£190,000)

Equalised cost for Jane: £200.36 + £92.56 = £292.91

What Kate Should Pay

Kate’s share of the business (£300,000) multiplied by Jane’s policy payments (£792)


Total value of the business (£1 million) minus Jane’s share of the business (£510,000)

 

+

Jane’s share of the business (£300,000) multiplied by Lucy’s policy payments (£147)


Total value of the business (£1 million) minus Lucy’s share of the business (£190,000)

Equalised cost for Kate: £484.90 + £54.44 = £539.34

What Lucy Should Pay

Lucy’s share of the business (£190,000) multiplied by Jane’s policy payments (£792)


Total value of the business (£1 million) minus Jane’s share of the business (£510,000)

 

+

Lucy’s share of the business (£190,000) multiplied by Kate’s policy payments (£275)


Total value of the business (£1 million) minus Kate’s share of the business (£300,000)

Equalised cost for Lucy: £307.10 + £74.64 = £381.74

Premiums for the three shareholders still total £1,214, but now they’ve been equalised to remove any unwanted tax implications unequal premiums might create.

Actual Cost

Equalised Cost

Jane

£792

£292.91

Kate

£275

£539.34

Lucy

£147

£381.74

Total Cost

£1,214

£1,214

In reality you don’t have to worry about the premium equalisation calculations because your accountant should be able to do this for you.

They typically ensure the appropriate amounts are deducted from current, capital or loan accounts or, as an alternative, individual director’s drawings to equalise premiums.

Sam Barr-Worsfold
Business Protection Expert at Drewberry

Get Shareholder Protection Advice

Shareholder Protection is probably the most complicated form of business protection, with premium equalisation being just one of the complications involved.

That’s why it’s best to get advice – give one of Drewberry’s experts a call today on 02084327333.

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 2274 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.

 

Drew was incredibly helpful all the way along and very responsive and patient with any questions I had (which were many). He was able to get me a much better deal on my new health insurance than I had been able to get online. A success all round!

Francesc Sale
07/06/2019
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