Are you a UK business owner wanting to learn more about shareholder protection tax treatment? This guide is just for you.
Here at My Key Man Insurance, 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 is certainly a financial product that your business will want to consider in the near future, a full understanding of the shareholder protection tax treatment for the company as well as individual shareholders is crucial. Here’s all you need to know.
When taking our shareholder protection, there are three possible routes to take;
The For 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.
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.
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 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.
Understanding the cost of shareholder protection is particularly important in relation to shareholder protection tax treatment when the company pays the premiums. After all, it is in everyone’s best interest to know how much of a tax deduction can be made. Ultimately, each company’s situation is unique. In most cases, companies look to;
Only a full and thorough consultation will allow you to gain clear answers regarding the costs as factors like the amount of cover and the total number of policies needed to cover all shareholders will have a huge influence. Speaking with our experts will ensure that the best solutions are found by taking the company circumstances and other protections – like director life insurance – that may already be in place.
Shareholder protection is undoubtedly one of the most complex insurance policies that you are likely to need in business. Therefore, working with a dedicated team of UK-based experts that can establish a winning plan while simultaneously ensuring that all tax matters have been considered is essential.
Here at Key Man Insurance, all of our products are offered with a best-price guarantee while our comprehensive range of services allows you to keep all aspects of commercial insurance under one roof. As long as all shareholders are in good health, most companies can expect to have their policies established in just 5-10 working days.
To find out more about shareholder protection tax treatment or take out a policy today, get in touch with our friendly advisors.
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