Shareholder Protection Insurance

The best person to put a value on your business would be your accountant. They would look at the net profit over the last 3 years, any assets and the number of shareholders, and we would insure you for this amount.

Yes, it might be possible to place an existing life policy into a business trust. However, we do not usually recommend this. HM Revenue and Customs may treat arrangements as reciprocal transactions if every shareholding partner or director were to make such an assignment. This would result in trustees becoming liable for capital gains tax on the assured sum.

Discretionary trusts are designed for personal cover. They allow an individual to place life policy under trust, which is usually for the benefit of their spouse, civil partner or another close family member(s). Therefore, a discretionary trust is not suitable for use when planning partnership or shareholder protection. The benefit payment would be left entirely to the discretion of the trustees.

This is the person – ‘settlor’ – who puts assets into a trust.

When a person (‘settlor’) places assets under the control of someone (‘trustee’) for the purpose or benefit of another person (or people – called ‘beneficiaries’) then a ‘trust’ is created as a legal relationship. Any assets transferred to the trustees then become their property – however, they would hold the assets on ‘trust’ for any beneficiaries. Considered the ‘nominal owners of the property’, the trustees have a legal obligation to deal with such property (assets) in the way in which the trust ‘deed’ has been set out. Usually, there are multiple trustees involved rather than just one. Plus, this could mean there are more ‘settlors’ involved in a trust.

This form of trust is the most suitable for shareholder and partnership protection because it is seen as a commercial arrangement. A Business Trust does not include the settlor’s spouse or civil partner as potential beneficiaries. Instead, co-partners or co-shareholding directors would become the settlor’s, as required.

Any new partners or shareholding directors are usually included as trust beneficiaries automatically. This means they would need to take out a new policy to make sure the value of their shareholding is fully covered.

This is when an arrangement is made allowing a deceased partner’s interest in a business to pass to surviving partners. Then, the value of the deceased partner’s shares will be received in cash by the beneficiaries of the estate. Automatic Accrual is only appropriate for partnerships – it cannot be used for shareholder protection – and is a method of business protection.

Widely known as a ‘cross option’, a Double Option Agreement is where shares are sold by their estate and bought by the company automatically should a shareholder die or become ill. For example, Mr Brown is a shareholder and plays an instrumental role in a technology firm. But, Mr Brown becomes very ill and is unable to return to work. The Double Option Agreement sells his shares to the company automatically, which means the company could use the insurance money to pay Mr Brown for his shares.

If a business owner becomes seriously ill, and critical illness cover has been included, they would be able to leave the business. It gives the option for co-owners to purchase their share in the business from the ill or disabled individual. However, the co-owners cannot force the sale of shares from the ill or disabled business owner. The wording for a Single Option Agreement is often incorporated within a Double Option Agreement.

Policy premiums paid do not benefit from tax relief when they are for the purpose of Shareholder Protection. In terms of Inheritance tax, if it is placed in trust, the benefit would not fall into the inheritance or estate of the deceased. We strongly advise speaking to your Local Inspector of Taxes for more clarification before the policy takes force as the tax treatment of the premiums cannot be assumed.