Service and support - business protection frequently asked questions

You can quote and apply for our Business Menu Plan, accessed through our online service (opens in a new window), 24 hours a day, 7 days a week. Paper applications can be sent to: Royal London Group, 22 Haymarket Yards, Edinburgh, EH12 5BH. 

If it is a company that is applying on the life of a key person, then you simply put the company's details in the section 'About the other applicant' on page 3 and then put the details of the person covered on the following pages.

If it is a partnership and the key person is a partner, this would normally be arranged by the partner taking out the plan on their own life and putting this under trust for the benefit of the other partners. You would therefore leave the section 'About the other applicant' blank and complete the rest of the form in the normal way. It is however important to make sure we receive the trust form before the plan starts.

Yes, our business trust is designed specifically for use with business protection plans. You can download a copy of our business trust form here (PDF).

No. In business protection arrangements it is usual to have any critical illness benefit paid to the beneficiaries. This makes sure that the proceeds are available to them to either buy the share of an ill owner or to invest in the business to replace the ill person. If this didn’t happen, the other owners could find themselves with an obligation to buy the share of the ill person but with no money available to them to actually do this.

There are 2 main differences.

The first is that the trust only includes people actually involved in the business as possible beneficiaries. This maintains the commercial nature of the arrangement making sure that no inheritance tax will be payable following a claim.

The second is that the trust holds any benefits payable on death or diagnosis of a critical illness for the benefit of the other owners but retains any other cover for the partner or shareholder taking out the plan (the split trusts keep any critical illness payment for the plan owner). This allows your client to include benefits such as Income Protection to replace an ill partner's or shareholder's income within a share purchase arrangement and this will be held under trust only for them, not the other owners in the business. The trust also reserves any Children's Critical Illness Cover for the partner or shareholder whose child is diagnosed with a critical illness instead of this being paid to the other owners.

We do not recommend that our business trust is used with an existing plan. This is because in the event of a claim this could lead to a liability to Capital Gains Tax (CGT) on the proceeds. This liability can arise because of the reciprocal nature of the arrangement. Each owner of the business is taking out a plan and putting it under trust for the other owners in return for the others doing the same. The putting of the plan in trust after it has started would therefore be an assignment for money or money's worth. Any subsequent disposal under that plan, including a claim would give rise to a capital gain calculated as the sum assured less the premiums paid, which is likely to give rise to a significant liability to Capital Gains Tax (S210 Taxation of Chargeable Gains Act 1992).

We therefore recommend that if using the business trust, it is always completed before the plan starts so that the plan is issued under trust from its commencement date and there is no assignment.

Yes we do have a draft agreement that your client can use with their legal advisers as a basis for their own agreement.

The agreement automatically includes a double option on the death of a partner or shareholder. This gives the family of someone who dies an option to sell their share of the business to the other owners. It also gives the other owners an option to buy that share from the family. If either side exercises their option then the other must comply.

The agreement can also include either a single option or a double option in the event that one of the owners is diagnosed with a critical illness.

The single option gives the ill person an option to sell their share of the business to the other owners. If exercised, the other owners must buy the ill person’s share, but there is no option for the other owners to force the ill person to sell.

The double option also contains an option for the ill person to sell their share to the other owners. But it also contains an option for the other owners to buy the ill person’s share if they do not return to work within a specified period, usually 12 months. If either side exercises their option, the other must comply. This gives some protection for the ill person from being forced out if they are able to return within a reasonable time. It also gives some protection for the other owners from having to support an ill person and their family when they are unable to contribute to the business because of their illness.

Yes, this is part of our draft cross option agreement. If the client wants to include an option for them to be able to sell their share of the business on diagnosis of a critical illness they simply need to include the relevant paragraphs in the agreement.

However, our draft agreement can also include what we call a deferred double option on critical illness. If this option is chosen the partner or shareholder will have an option to sell their share of the business as soon as they qualify for a payment under their plan. But if they do not return to work within a specified period, usually 12 months, the other partners or shareholders then have an option to buy the ill person's share.

If the business is a company there are 2 ways this can be set up.

The first is for each shareholder to take out a plan on their own life for the value of their share of the business. They write that plan subject to a business trust under which all of the other shareholders are the beneficiaries, taking care to make sure the trust is completed before the plan starts. The shareholders then enter into an agreement, which gives the family of a shareholder who dies an option to sell their share to the other shareholders. The other shareholders also have an option to buy their share. If either the family or the other shareholders exercise their option the others must then comply. They can also include either a single option or a double option on diagnosis of a critical illness.

The second option is for the company to purchase the shares instead of the other shareholders. Under this arrangement the company would take out a plan on the life of each of the shareholders so that the company receives the money directly and no trust is needed. They would still enter into a cross option agreement, but this time the agreement would be between each shareholder and the company. The agreement would provide a double option on death and they can again include either a single option or double option on critical illness. There are several other formalities they must go through to actually purchase the shares and not all companies can do this.

If the business is a partnership there are also 2 ways this can be done.

The first is the same as the first way for a company. Each partner takes out a plan on their own life and puts that under the business trust for the benefit of the other partners. They then enter into a cross option agreement giving the same options to buy and sell the share of the business to their family and the other partners. If either side exercises their option the other side must comply.

The second is what is known as automatic accrual. In this type of arrangement instead of putting the plan under trust for the other partners each partner takes out a plan for the value of their share of the business. The plan is written under trust for the benefit of their family using the normal split trust rather than a business trust. Within their partnership agreement there will usually be a clause, which states that if any partner dies their share of the business automatically passes to the other partners and that they will maintain a policy to the value of their share of the business to compensate their family. No purchase of the share therefore occurs, it simply accrues to the other partners, hence the name automatic accrual.

Yes, but they should be aware of the tax consequences of doing so. These depend on who is taking out the plan and what type of business it is.

If the business is a company and they are paying the premiums on a plan taken out by one of the directors or an employee, the premium would be treated as part of their remuneration. They would therefore have to pay income tax and employee’s National Insurance on the amount of the premium. The company can however treat this as an expense and therefore deduct the premium from their profits for corporation tax purposes, but will have to pay employer's National Insurance.

If the business is a partnership and they pay the premiums out of a business account on a plan taken out by a partner, this will simply be classed as part of his drawings and would be subject to income tax and National Insurance in the normal way. If however they are paying the premiums on a plan taken out by an employee, the employee would again have to pay income tax and employee's National Insurance and the partnership would be able to offset the premium against their profits, but would have to pay employer's National Insurance.

This will depend on the purpose of the plan, their relationship with the employee and the type of cover involved.

If they take out Life Cover, Critical Illness Cover or Life or Critical Illness Cover, they will normally only pay tax on any claim if the plan qualifies for tax relief on the premiums. To get relief from tax they must meet all of the following conditions:

• The plan must be to cover loss of profits only
• The relationship between the client and the person covered must be employer and employee
• The cover must be short term
• The amount of cover must be reasonable.

This means that if the plan is for example to cover the repayment of a loan rather than a loss of profit, they are unlikely to get relief. If the person covered is a significant shareholder (generally meaning they or members of their family own more than 5% of the business) they are unlikely to get relief.

If the cover is not short term, which normally means a term of 5 years or less, they are unlikely to get relief. If the amount of cover is not related to the amount of profit they will lose if this employee is no longer able to work for them, they are unlikely to get relief. If they do not get relief they will not normally be taxed on any amount they receive from a claim. However they should speak to their local inspector of taxes setting out the full details of the plan and ask them to confirm how they will treat the plan for tax purposes.

If the plan includes Income Protection this is taxed differently in the event of a claim. If we pay a claim, the amount your client receives will be treated as a trading receipt and they must pay tax on it. However, if they pay this amount to their employee to continue their salary they can treat this as an expense for tax purposes so the receipt and expense cancel each other out. They will however have to continue to pay employer's National Insurance and to deduct income tax and employee's National Insurance from the amount they pay the person covered.

Your client's plan comes with Cover Increase Options. This means they can increase their cover in certain circumstances, without giving us any medical information.

How it works

The following covers come with Cover Increase Options if we gave your client standard terms:

• Key Person Income Protection
• Life Cover
• Critical Illness Cover
• Life or Critical Illness Cover.

Your client can increase their cover, without giving us any medical information, if there's an increase:

• in the value of a key person
• to their business mortgage or loan but not if there's an increase in their overdraft
• in the value of a partner's, limited liability partnership member's or shareholder's interest in the business.

All we need to see is some evidence of the event. This could include:

• how the value of the key person has been calculated, and we might also need to see copies of the business accounts
• written confirmation from the lender or a copy of the new loan offer
• evidence of the increase in the value of partner or shareholder interest.

You or your client will need to ask us to increase their cover within six months of the event happening. And the person covered must be under 55 at the time - if there are two people covered, both of them must be under 55. We'll work out a new premium for your client's cover, and your client can decide whether they want to go ahead with the increase.

Limits on increasing your client's cover

Your client can increase their cover more than once. The total increase is the lowest of:

• half the original cover amount
• £200,000 for cover payable as a lump sum
• £10,000 a year for cover payable as regular payments.

If they have more than one type of cover or more than one plan on the life of the same person covered with us, the limits apply to all of them added together – not separately to each of them.

Key Person Income Protection comes with some extra limits, so that the total increase is no more than the lower of:

• the maximum percentage of pre-incapacity profit we originally agreed to cover, and
• our maximum cover amount.

Limits for an increase in the value of a key person

Your client can increase their cover by a maximum of:

• five times the amount of increase in salary, or
• twice the increase in gross profits attributable to that person
  subject to the limits above.

They can't increase Key Person Income Protection using this option within 12 months of us stopping paying a claim or if the person covered meets the definition of incapacitated.

The new cover will have the same additional features as the original cover. And it will be on the terms and conditions we offer at the time of the increase. It must last at least as long as our minimum term at that time, but no longer than the time remaining on their original cover. So if the time remaining on their original cover is less than our minimum term, the cover can't be increased in this way.

Your client's premiums will be based on:

• the terms we applied to their original plan – or, at the time of any restart
• our pricing when we increase their cover
• the person covered's age when we increase their cover.

We can't offer your client Cover Increase Options if:

• we accepted their plan on non-standard terms – for instance, if we had to charge the person covered a higher premium, or if we had to apply some exclusions
• we're paying a claim, considering a claim, or if a medical practitioner has given the person covered a diagnosis or possible diagnosis that would allow your client to claim
• they're not resident in the UK, Jersey, Guernsey or Isle of Man.

If your client claimed for incapacity, they can't use Cover Increase Options within 12 months of us stopping the payments.

Your client won't be able to increase any of the covers if the person covered is already suffering from an illness or condition covered by the plan for which they have or have not yet submitted a claim.

The only time this can be done is where the client is a sole trader. In all other cases the 2 needs should be addressed separately.

This is because it is essential that business protection arrangements are established on a purely commercial basis. This will make sure that there are no problems with inheritance tax being charged unexpectedly. To keep an arrangement on a commercial basis only those who actually own shares in the business should be able to benefit from the arrangement. You should not therefore include a shareholder’s or partner's spouse or children as beneficiaries under any trust arrangement unless they also own a share of the business as this would prevent the arrangement from being purely commercial.

If the arrangement is not commercial it could be argued by HMRC that a gift with reservation by associated operations has been established. That is because each partner/shareholder is taking out a plan and putting this in trust for the benefit of the others in return for them doing the same thing. This is an associated operation and so if there is an element of gift (i.e. someone who is not themselves taking out a similar plan being able to benefit), a gift with reservation will arise. This would mean if the partner/shareholder died HMRC would treat the policy proceeds as part of their estate for inheritance tax. It is therefore advisable to keep personal protection arrangements separate from business protection arrangements.

However for a sole trader they are the business and there are no other owners. Their protection plan would therefore simply be placed under a normal split trust for their family. The family then have the funds available to them outside of the business to maintain their lifestyle. It is therefore possible to combine cover for both personal and business reasons in these circumstances.