Pearson May Financial Update: Life insurance options for business

March 17, 2017

Pearson May partner David Richards looks at the various types of life insurance available to businesses


You may well have considered life insurance in the context of your personal and family relationships to provide for loved ones on your death or critical/terminal illness. But what about your business relationships? Have you thought about providing a means by which your fellow directors and shareholders could buy your shares, or the business receive a lump sum, should anything happen to you?


It is relatively common for shareholders of a company to have an agreement drawn up whereby, should a shareholder die, their executors must offer their shares to the other surviving company shareholders, with a mechanism to determine the price.


What is perhaps not as common is the directors/shareholders having a plan in place whereby the surviving shareholders have access to sufficient funds to enable them to purchase these shares from the deceased’s estate. This can be relatively easily dealt with by having an appropriate term insurance policy in place.  Premiums have to be funded out of taxed income, however, and there may be a better way of achieving the objective.


Keyman insurance


It is relatively common for companies to have keyman insurance in place for the loss of a director or key employee. The basics of such insurance are that any pay-out on death (and usually critical illness) is paid to the company and the company pays the insurance premiums.


Whether such premiums are tax deductible as far as the company is concerned and whether the proceeds of the policy are taxable depends upon the circumstances. If the sole purpose of the policy is to meet a loss of trading income that may result from loss of the services of the key person, rather than a capital loss, the premiums would normally be deductible and the proceeds taxable.


However, if, for example, the purpose of the policy was to provide funds so that the company might buy back the shares of the deceased shareholder, this would normally be regarded as a capital purpose with the premiums not being deductible and the proceeds not taxable.


A word of warning must be given here. Sometimes the company is given the right to buy the shares of the departing shareholder. However, unless the qualifying conditions are met, this can land the executors or beneficiaries of the deceased shareholder with an Income Tax liability, because the payment to them by the company is treated as a dividend. Many company articles and shareholders’ agreements do not cover this point appropriately.


Another benefit with keyman insurance is that the insurance payments are not usually classified as a taxable benefit in kind on the director/shareholder concerned.


Relevant life policies


Under this type of policy the tax treatment can be more favourable since the premiums are normally eligible for Corporation Tax relief, if paid by the company, and any pay-outs to the beneficiaries are not subject to tax. The policies would also usually be written in trust so there can be favourable Inheritance Tax treatment as well. Additionally, premiums paid do not count as a taxable benefit in kind for the individuals concerned.


However, relevant life policies, unlike keyman insurance policies, usually only pay out to a discretionary trust for the benefit of the family of the person covered. The wording and conditions attached to the policy in question should be checked carefully, as should the wording of the trust. The fact that the beneficiaries must be close family members may not present a problem for some companies (where the other shareholders are family members) but obviously such a restriction is not suitable for companies with unrelated shareholders.


The above is for general guidance only and no action should be taken without obtaining specific advice.  Independent professional advice should be sought from insurance providers, financial advisers or brokers regarding the various policies and products available.


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