Shareholder Protection Tax Treatment

An own life under business trust agreement can become a little complex as multiple policies must be tied together. However, the fundamentals are very easy to understand;

• Individual shareholders take out an insurance policy on their own life,
• All policyholders combine their shareholder protection in a trust,
• When a shareholder dies, the payout from their policy is paid to the trust.

In most cases, the company pays the individual premium that covers each shareholder. Premium payments can be deducted as legitimate business expenses for corporation tax purposes. Moreover, the company will avoid any tax implications following payouts to the trust. However, shareholders will have to pay tax on premiums as they are deemed a taxable benefit-in-kind by HMRC.

Conversely, when individual shareholders cover the costs of their premiums, they must do it from their post-tax income. 

Who Pays for Shareholder Protection?

To recap the payment of shareholder protection agreements will depend on the route you take;

• For Life of Another – individual shareholders pay for their premiums and receive the payout directly.
• Company Share Purchase Agreement – the business is responsible for taking out the premiums on each shareholder.
• Own Life Under Business Trust – it depends on the individual policies that you arrange.

Is Shareholder Protection a P11D Benefit?

If the premiums are paid by the business directly, all individual shareholders should be made aware that HMRC will declare this a P11D benefit-of-kind. As such, they will be required to pay any relevant Income Tax and National Insurance contributions based on the value of the premiums.

Still, when combined with other key details like key man insurance and a shareholders’ agreement that details how the company will continue to operate, the insurance protection will deliver a range of benefits for partners and shareholders. Not least because it protects against the threat of the deceased’s family selling the shares. 

Is Shareholder Protection a Business Expense?

If the company pays for the shareholder protection plans on behalf of individual shareholders and partners, the cost of the premiums is tax deductible as a business expense. However, the individual shareholders will be liable for relevant tax payments due to the aforementioned P11D benefit status. When an individual shareholder pays their own premium, the company is not eligible for tax benefits – although they are also freed from any tax obligations related to the policy. 

Shareholder protection will cover death and terminal illnesses where the shareholder has been given under 12 months to live. However, you will have the option to add critical illness to the policy. The addition of this feature will not alter key aspects, such as who is responsible for paying the premiums or potential P11D benefit status.

Which Taxes are Relevant for Shareholder Protection Holders?

Understanding who may be taxed due to the premiums or payouts of shareholder protection policies is one thing. However, it is equally vital to become aware of the different taxations that may become relevant at this time. They are detailed below:

Capital Gains Tax

In theory, you could be liable for CGT if the value of the shares increases between the date of the shareholder’s death and the date that they are sold back to the company and surviving shareholders. Most policies, however, overcome this by having a set share value stipulated within the agreement. In most cases, then, all relevant parties will avoid any complications linked to capital gains.

Corporation Tax

If you are worried about corporation tax, the good news is that you will not be liable to pay it in relation to the proceeds gained from this type of policy. So, the lump sum can be used to exercise the purchase of the deceased’s shares without unnecessary complications. Furthermore, as already detailed, companies can claim back the premium costs as legitimate business expenses in relation to both corporation tax and national insurance. 

Income Tax

Following a shareholder’s death – or critical illness – the remaining shareholders may be concerned about income tax implications. Proceeds from the policy will be paid without any impact on a person’s income tax liabilities, although there could be a small income tax obligation in direct relation to the premium payments. 

Inheritance Tax

Inheritance tax may be due when payouts are made directly to the deceased’s estate or the other shareholders. However, a trust would ensure that the payments are made to the trust itself, thus bypassing those problems. As well as avoiding large inheritance tax payments, it can prevent disagreements with the deceased shareholder’s surviving family.