FAQS – Shareholder Protection

Here are some of the questions we commonly receive in relation to Shareholder Protection Insurance. However, so that we can provide you with the best help and advice please give our team a call on 0116 366 6866 or use the form to request a call back. 

See our main page on Shareholder Protection

What is the purpose of Shareholder Protection?

This form of insurance protects a company and the owners of the company against the death of an owner or shareholder, or if the owner or shareholder suffers a Critical Illness.

What type of policy is used in this instance?

In this situation, you would use a Life insurance policy or Life insurance with a Critical Illness policy.

In terms of the amount of cover, how would you calculate this?

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.

What if I have an existing policy – can this be used?

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.

What about a Discretionary Trust – can this be used?

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.

What does the term ‘settlor’ mean?

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

What exactly is a Trust and how does it work?

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.

What about a Business Trust – how does this differ?

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.

What happens when a company brings in a new shareholder?

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.

What does Automatic Accrual mean?

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.

What is a Double Option Agreement?

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.

What is a Single Option?

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.

What happens in relation to tax?

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.

What if the company pays the insurance premiums?

If the business pays the premiums, this would be taxable in the hands of the partner or director as it would be considered additional remuneration.

Would policies be liable for Inheritance tax?

If HMRC accepts the trust is part of a commercial arrangement, proceeds from the policy will not form part of the deceased’s estate.

What does the term Commercial Arrangement mean?

This arrangement would be classed as commercial if all business owners participate and there is no element of gifting. As a form of business protection, the business owner’s spouse or civil partner or family must not be able to benefit from the trust. Plus, it is also important to note when any new shareholders join a Commercial Arrangement.

What are the main benefits of Shareholder Protection?

It provides protection and peace of mind to both the company and the family of the shareholder in knowing that if something was to happen to the shareholder, the Shareholder Protection Insurance would allow the business to buy the shares from the next of kin.

How can I value my company shares for the purpose of shareholder insurance?

We strongly advise you speak to your accountant.

How does shareholder insurance pay out?

If the insured person(s) suffers a critical illness (or terminal illness), or dies, then Shareholder Protection will pay out the insured sum.

Do I have to have a U.K. based business to be able to qualify?

Yes, the business has to be in the U.K. if you wish to apply for this type of cover.

Does it relate to the size of the business?

No, a Shareholder Protection policy is designed to meet the needs of Limited companies that has more than one shareholder involved.

What is this difference between Shareholder Protection and Key Man Insurance?

Any member of a business considered to be “Key” to the business can have Key Man Insurance. This could be your main Sales Manager and does not need to be a Director, Partner, or Shareholder. As a comparison, Shareholder Protection protects those who own shares in the business.

Does a company need to have a Shareholder Agreement?

It should have a Shareholder Agreement in place already – however, it is worthwhile checking your Shareholder agreement to make sure a Cross Option Agreement can be included.

Why should I protect the director’s shares?

Rather than going to their next of kin, Shareholder Protection is designed to put shares owned by the deceased shareholder back into the business, protecting both the shareholder’s family and the business itself.

Is Partnership Protection the same as Shareholder Protection?

In some ways, these policies are similar. However, with Partnership Protection, there are no shares or a need for a transaction. Rather than buying out the deceased members shares with Shareholder Protection, the sum would be used to gain full control over the Partnership.

Do we need to provide details about our medical history and finances?

For us to make an accurate recommendation in terms of how much cover is required, we will need information about the company’s finances. Plus, we would ask you about your medical history as all policies will be subject to a Health Questionnaire.

How expensive is this type of cover?

The amount of cover required is usually dictated by the value of the shares. The cost of the insurance will depend on the terms of cover, the age of the insured persons and their smoking status.

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