Limited company – Partnership & shareholder protection
Own-life plans under business trusts
An own-life plan for each shareholder, with each plan being written under its own business trust from the start.
Things to think about:
- Are the articles of association/any shareholder agreements compatible with the protection arrangement? They may need to be changed, or if there’s no agreement, one may need to be put in place.
- A cross-option agreement can be prepared to set out how the shares will be valued and give the shareholders options to buy and sell the shares in the business.
- Equalising premiums to remove inequalities due to age or differences in ownership share reinforces the commerciality of the arrangement. This can be important for inheritance tax.
Tax:
- Premiums can be paid from the shareholders’ post-tax income.
- If the company pays the premiums and doesn't re-charge the cost to the shareholder, the premiums will be assessable for income tax and National Insurance contributions (unless the payment represents re-payment of a director’s loan account).
Company share purchase
The company takes out a plan on the life of each shareholder to the value of their shareholding. If a shareholder dies or gets a critical illness, the company buys the shareholder’s shares, which are then cancelled and revert to un-issued share capital.
For cover to be taken out in this way:
- The articles of association must let the company purchase its own shares.
- The requirements for company share purchase under the Companies Act 2006 must be met.
- The shares should have been owned by the shareholders for at least 5 years before the sale or 3 years for a sale by their personal representatives. If less, there may be a substantial income tax liability for the shareholders or their estates when they die.
Things to think about:
- Do the articles of association permit company share purchase? If not, they must either be changed or cover needs to be taken out in a different way.
- A cross-option agreement can be prepared to set out how the shares will be valued and to give the company options to buy, and the shareholders/their estates options to sell the shares in the business.
Tax:
The company will pay the premiums, which won't be deductible as a trading expense. The premiums won't be subject to income tax or National Insurance.
Life-of-another plans
Each shareholder can take out a plan on each co-shareholder. The payout from a claim will be paid directly to the shareholder who owns the plan.
Things to think about:
- Cover shouldn't be arranged in this way if the business has more than 3 shareholders or if the ownership of the business might change in the future.
- Are there articles of association/any shareholder agreements compatible with the protection arrangement? They may need to be changed, or if there’s no agreement, one may need to be put in place.
- A cross-option agreement can be prepared to set out how the shares will be valued and give the shareholders options to buy and sell the shares in the business.
Tax:
- Premiums can be paid from the shareholders’ post-tax income.
- If the company pays the premiums and doesn't re-charge the cost to the shareholder, the premiums will be assessable for income tax and National Insurance contributions (unless the payment represents re-payment of a director’s loan account).
For more information, download our guide.