If a business owner or shareholder dies their share in the business may be passed to their family. Surviving business owners could lose control of part or, in some circumstances, all of their business. The family may choose to become involved in the on-going running of the business or could even decide to sell their share of the business to a competitor.
Example (based on a true story)
MegaBuild Ltd (MGB) is a Construction company. There are three shareholding directors, Mark with 51%, Gary with 39% and Ben with 10%.
MGB is currently worth £1million.
Unfortunately, Mark was recently involved in a motor accident and was killed instantly.
MGB had an efficient succession plan in place should any of the directors die unexpectedly. They signed a cross option agreement and each director had a term assurance policy for the value of their shareholding. The policies were under Trust for the other directors, with all three of them as Trustees.
The life assurance paid out £510,000 to Gary & Ben as Trustees and they split the money between themselves as surviving directors and beneficiaries, and used the money to buy Mark’s shares from his estate.
Mark’s estate now has £510,000 cash for the value of his shares. The surviving shareholders continue with MGB Ltd business, with no further obligations to Mark’s family.
Whilst the money can never bring Mark back, his partner was pleased with the outcome as she had little knowledge of running the business, and would have just sold her shares to the highest bidder. Without life policies, neither Gary or Ben would have been able to raise the funds to purchase Marks shares.
Protection premiums can differ depending on age, personal health and other circumstances. In this example, Gary’s premium was the highest. The directors were able to benefit from something called premium equalisation which ensured the cost of protection was divided fairly. Premium equalisation reflects the business interest being protected, and establishes that the policies are purely commercial in nature. This ensures there’s no adverse IHT treatment on the arrangements. As the premiums are paid by MGB, it will be treated as taxable remuneration for each shareholding director.
Expert Guidance for You and Your Business
By arranging a combination of both a written agreement and insurance plans, the business owners can control both the future ownership structure of their business and also compensate their family for loss of the business asset at the same time.
Our advisers will work with you to help you consider all of the options and issues relating to this type of protection, including advice relating to shareholder and partnership agreements, cross-option agreements and different types of insurance solutions.
This blog post first appeared in December 2016 as a feature article for Rawcliffe & Co Chartered Accountants’ Blog. To stay informed with all issues financial & tax related, including key dates and important deadlines head over to Rawcliffe Blog.