Protecting Directors and/or Shareholders

• What is share purchase protection?
  If the co-owner of a business dies or becomes seriously ill, share purchase protection gives the remaining shareholders in the business the option of buying their shares and therefore keeping control of the business. The alternative is that a family member may inherit and be entitled to some control of the business.

• What sort of businesses is it for?
  The cover can be arranged to meet the individual needs of all types of companies and partnerships. You can choose both the type of policy, with life cover and critical illness protection available, and also the term of the cover.

  This, together with the flexibility in the level of benefit you can choose, means you can ensure that you'll have the financial power to prevent unwelcome shareholders becoming involved in the running of your company.

• Why choose share purchase protection?
  When a co-owner of a company dies unexpectedly, apart from the loss of their day-to-day input into the business, their shareholding will be passed on as part of their estate in the normal way. If their beneficiaries choose to sell the shareholding, there is no guarantee that the new buyers will have the same vision or priorities as the deceased.

  In these circumstances, it may be in the best interest of the business for the remaining shareholder or shareholders to buy the shares. However, most companies do not financially plan for such an eventuality.

  The same need arises when the co-owner becomes seriously ill and unable to return to work. Although shares do not pass to beneficiaries, it may be desirable for the co-owners to have options to buy or sell the shares.

• how share purchase protection works
  Share purchase protection covers one nominated individual, who can be a partner, shareholder or an employee. If they die or are diagnosed with a terminal or critical illness, the policy pays a lump sum either on death or shortly after the diagnosis of a specified disease.

• Share purchase agreements
  The policy can be set up to suit the company's own share purchase agreements. In some cases, these can be complex and it may be difficult to devise a share protection contract which will cope with partners or shareholders leaving and joining the arrangement.

• Why might share purchase protection be needed?
  When the co-owner of a business dies or becomes ill, the business may want to buy back their shareholding to prevent others becoming involved. Share purchase protection ensures that they have the funds to do this.

• How is the level of protection set?
  The benefit should relate to the value of the shares held by the person insured. This should be based on a professional valuation. Therefore, regular revaluations should be carried out and the level of cover changed accordingly.

• Can a company apply for share purchase protection?
  In private companies, major shareholders are often actively involved in the business. A share purchase protection policy offers a way of ensuring that their shares don't pass into unfavourable hands, but it is also appropriate to any other shareholder.

• Can a partnership apply for share purchase protection?
  Yes. Normally, when a partner dies the partnership is dissolved and the beneficiaries of the deceased are entitled to the value of their interests in the business. A share purchase protection policy can be used to provide funding so that the value of these interests can be paid out without damaging the business.

• How are premiums paid?
  In companies, the premiums can either be paid personally by individual shareholders or by the company itself. In partnerships, the individual partners pay the premiums, although there are ways of splitting the costs fairly.

• What are the tax implications of a share purchase protection policy?
  There are a number of scenarios for tax under share purchase protection. If the company pays the premiums, these will often qualify for tax relief as part of a director's salary package. However, these are then treated as part of the shareholder's gross salary and will be subject to income tax and National Insurance contributions for the shareholder.

• What are the inheritance tax (IHT) implications of a share purchase protection policy?
  If the arrangements between the co-partners or co-shareholders are established on a commercial basis so it's viewed as a true business arrangement, the premiums paid are not gifts or transfers of value for IHT purposes. Therefore, proceeds from the policy will probably not be subject to IHT.



• Does capital gains tax have any effect on share purchase protection?
  Our business protection trust can only be used with new policies in order to avoid capital gains tax that would be enforced on an existing policy put under trust as part of a 'commercial' arrangement. If a critically ill partner or shareholder exercises their single option agreement to force the co-partner or shareholder to buy out their share, this buyout is treated as a disposal for capital gains tax purposes.
  
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• HM revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.