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This page provides general information about how shareholder protection insurance is typically taxed in the UK. It does not constitute tax advice, legal advice, or a personal recommendation. Tax treatment depends on individual circumstances and may be subject to change. You should always seek independent advice from a qualified tax adviser or solicitor before making any decisions based on this information. My Key Man Insurance is authorised and regulated by the Financial Conduct Authority but is not a tax adviser.
Our team of passionate experts provide a plethora of business protection services. This includes shareholder protection insurance, which is a life insurance policy designed to facilitate the buyback of shares from a deceased (or critically ill) shareholder so that remaining shareholders can retain full control in the event that one of the business partners dies.
While it’s a product most growing companies should consider, getting the shareholder protection insurance taxation right is what determines whether the cover actually works as intended when it’s needed. A full understanding of the shareholder protection tax treatment is crucial for everyone involved. Here’s all you need to know.
The “Life of Another” route is the simplest and most commonly used solution. In this case, individual shareholders pay their personal insurance policies relating to the lives of other shareholders from their post-tax salaries.
Both the payment of the insurance premium and the payout following a shareholder’s death (or critical illness) go directly through the shareholder rather than the company. Therefore, the business has no tax obligations at either end of the agreement. However, the individual beneficiaries of any payout will incur tax from HMRC.
It should be noted, however, that this method only works when you have a small number of shareholders. This is because each shareholder must take out a policy for each other shareholder. Once you get into the realm of five or more shareholders, the sheer volume of individual policies held makes this an unsuitable option.
In a company share purchase agreement, the business pays the premiums for each shareholder. It works as follows;
There is no requirement for a trust in this instance because payouts are made to the company. While the company is not taxed following the payout, it also does not have the ability to claim premiums as a business expense as the policy is not related to any proposed trading losses caused by the death of a shareholder.
When taking this path, you also need to complete a cross-option agreement. It is considered a crucial step for tax purposes because it means that the company has the option rather than an obligation to buy the deceased shareholder’s shares. In most cases, the future purchase will be registered as a capital receipt, making it free from tax.
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;
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.
To recap the payment of shareholder protection agreements will depend on the route you take;
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.
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.
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.
A few recurring issues come up when businesses set up shareholder protection without checking the tax position first. The most common is skipping the cross option agreement on a Company Share Purchase Agreement. Without one, HMRC could treat the arrangement as a binding obligation rather than an option, which risks the shares no longer qualifying for Business Relief for Inheritance Tax, and can also change how the eventual payout is taxed. A qualified adviser can confirm how this applies to your specific arrangement.
Another is assuming premiums are always tax deductible regardless of which route is used. As covered above, this depends heavily on the structure, and getting it wrong can mean you lose an expected deduction or faces an unexpected P11D benefit for individual shareholders. An accountant or tax adviser should confirm the deductibility position before you proceed.
It’s also easy to set up shareholder protection once and never revisit it. If a new shareholder joins, an existing one sells part of their stake, or there’s a restructure, the original policy and trust arrangements may no longer reflect who actually owns what, which can undermine the tax outcome the arrangement was originally set up to achieve.
Shareholder protection insurance tax treatment sits alongside several other tools owners use to plan for the unexpected. If someone leaves under different circumstances, our guide to Shareholder Protection Considerations covers succession planning more broadly, while Shareholder Protection Cross Option Agreement explains the legal mechanism behind the Company Share Purchase Agreement route above in more detail. Businesses structured as a traditional partnership rather than a limited company should look at Partnership Protection instead, and if you’re weighing this up against cover for an individual key employee, Key Man Insurance Taxation explains how that’s taxed differently.
With three routes on the table, the right one usually comes down to how many shareholders you have and how hands-on you want the arrangement to be. Life of Another tends to suit a small number of shareholders who are comfortable each holding a policy on the others directly, with no central premium payer or shared paperwork.
A Company Share Purchase Agreement is usually the more practical choice once you have more than two or three shareholders, since a single policy covers each shareholder rather than several personal ones. Own Life Under Business Trust sits between the two: it keeps individual ownership of each policy but uses a trust to bring everyone’s cover together, which some businesses prefer for flexibility as people join or leave.
None of the three routes is automatically ‘better’ from a tax perspective, since each shifts the deductibility and P11D position differently, as set out above. The right choice tends to follow your shareholder structure first, with the tax treatment then confirmed for that specific route.
We strongly recommend taking independent advice from a qualified tax adviser or accountant to confirm the most appropriate route for your specific circumstances before putting any arrangement in place.
It isn’t a legal requirement, but it’s what usually keeps the Company Share Purchase Agreement route working as intended. It gives the surviving parties the option to buy the shares, and the deceased shareholder’s estate the option to sell them, without normally creating a binding obligation for either side to go through with the purchase or sale. Keeping it as an option rather than a binding commitment matters, since a binding obligation to buy or sell shares can affect whether those shares still qualify for Business Relief for Inheritance Tax. Most advisers recommend putting a cross option agreement in place at the same time as the policy rather than adding it later.
We recommend taking independent legal and tax advice on the cross option agreement before putting it in place, as the specific wording and structure can affect its tax effectiveness.
The tax treatment itself doesn’t change based on shareholder numbers, but the practical route often does. With only two, a Life of Another arrangement is usually simpler to set up than with five or six, since each only needs a policy on the other rather than a web of policies across a larger group. Beyond a handful of shareholders, a Company Share Purchase Agreement or Own Life Under Business Trust route tends to be more practical.
It can. Corporation tax relief on premiums generally depends on the policy being connected to a trading purpose, so a non-trading holding company may find some of the usual premium deductions don’t apply in the same way. If your group structure includes one, it’s worth getting advice on which entity should actually hold the policy before you set anything up.
This is a complex area. The position will depend on your specific corporate structure and you should take advice from a qualified tax adviser before proceeding.
Individual shareholders can generally pay for a Life of Another or Own Life Under Business Trust policy from post-tax income, including dividends, rather than salary specifically. What matters for tax purposes is that the payment comes from the shareholder’s post-tax funds, not the specific source of that income.
Tax treatment will depend on your individual circumstances. Please consult a qualified tax adviser to confirm the position in your case.
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The standard of service was first class. They kept me up to date with progress on my Relevant Life Policy, followed up promptly following delays caused by my medical practice being slow in compiling reports, and responded instantly and clearly to any questions I had.
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