Keyperson and Shareholder Protection
The sudden death or illness of a Keyperson or Shareholder in your business can have wide reaching financial consequences for the business as a whole. We will now look at both these scenarios, and illustrate where a Business Protection plan can anticipate, quantify and solve these issues.
The death / illness of a Keyperson – Keyperson Cover
Management expertise, experience, and contacts are often a business’ most important assets. The sudden loss of a Keyperson can cause immediate financial consequences for a business – i.e. loss of contacts, reduction in turnover/profit, business interruption, recruitment/replacement costs, and possible calling in of loans. The solution to this is for the company to effect Keyperson Cover on the Keyperson. This is a Life Assurance Policy, paid for by the company, on the life of the Keyperson.
The policy provides a lump sum payable to the company on death / illness, and is used to mitigate the financial loss that the business would suffer in the event of death / illness of the Keyperson. The Sum Assured is usually related to either the Keypersons salary, or based upon their contribution to the company’s profits or turnover. The proceeds of the Keyperson Cover, where used to replace lost profits, would be subject to Corporation Tax in the same way as profits would.
The Loss of a Shareholder – Shareholder Protection
The death of a Shareholder of a business can also have wide reaching financial implications for a company. The surviving shareholders may lose control of the business, the next of kin of the deceased shareholder may refuse to sell the shares, and even if the deceased’s next of kin are prepared to sell, there may be a lack of liquid capital to buy them out. These scenarios are all unpalatable for all concerned, but can be solved by way of Shareholder Protection.
Each shareholder is insured by the company for a sum assured related to the value of their shareholding – this can be equal to a portion of their shareholding, or their full shareholding. On death, the funds are paid to the company. The company then use these funds to buy the shares back from the deceased shareholders next of kin. The mechanics of this transaction are underpinned and compelled by a Shareholder Protection agreement, which is an agreement drafted at the outset by the company’s legal representatives. This ensures that the shares are bought, and sold, as required. It should be noted that independent legal advice must be sought in relation to the preparation of this agreement.
The net effect of this is that the surviving shareholders retain control of the company, and the next of kin of the deceased shareholder receive fair market value for their shareholding.
The proceeds of a company owned Shareholder Protection policy may be exempt from Capital Gains Tax, and in such circumstances no tax liability would arise for the company. It is important to note that that the value received for the shares by the deceased’s next of kin could potentially give rise to an Inheritance Tax liability, depending on the relationship between the next of kin and the deceased shareholder. Independent Tax advice should be sought for all tax related matters.
Both the above scenarios can exist separately or together. The characteristics and circumstances of each company are unique, and specific and bespoke advice is required in each instance. Independent legal and taxation advice should also be sought where appropriate.
If you are concerned that you have any exposures or if you like to discuss this area in more detail we will be delighted to assist and provide an indication of the cost of cover to meet with your requirements, please contact Glennon today.