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Point of View

How to protect your business

Carl Bloomfield, Wealth Planner

 

When Phillip Carter, Founder and Chief Executive of Carter & Carter plc, died in a helicopter crash, no-one could have predicted that his highly successful, multi-million pound company would enter administration less than a year later. Not only did his family have to deal with their own personal tragedy, they had to deal with the painful demise of a family business, and the loss of 500 jobs*, which may have been avoided had Mr Carter taken out appropriate business protection.
 
It’s a stark reminder of why entrepreneurs need to put business protection in place – especially as much of their personal wealth and future prosperity is wrapped up in the company. Yet, surprisingly, few business owners take adequate steps to protect their most important asset, leaving themselves, their family, and their employees needlessly exposed.
 
There are different types of business protection to consider:

Key Person Protection

Key Person Protection will make a lump sum payment to the company if a key individual dies, or suffers a critical illness. A key person isn’t necessarily the owner, or chief executive; it could be someone with unique technical knowledge, or the person responsible for bringing in business.  The implications of losing them would be drastic for the business, and the funds are typically used to offset the loss of profits, and fund the recruitment of a suitable replacement.  It is also common for the funds to be used to clear outstanding borrowing, sometimes at the insistence of the bank.

Shareholder/Partnership Protection

Shareholder or Partnership Protection is taken out to ensure that a business has enough money to buy the shares of a deceased Director/Partner back from their family in the event of their death. This is particularly necessary if the value of the shares has increased significantly since they were issued.

How does shareholder/Partnership protection work?

Mr Smith and Mrs Colvin incorporate a Widget building business together.  The business is doing very well and after five years it is now worth £1million.  Mrs Colvin suddenly and unexpectedly passes away and her shares now go to Mr Colvin and the children.  Mr Colvin and the children have no idea how to run the business or even the desire to do so.

In an ideal world, Mr Smith would buy the shares back from Mr Colvin for £500,000, half the value of the company.  This will give Mr Smith full control of the company and the family is compensated for the years of sacrifice and hard work that Mrs Colvin put in to build the value.

If the company is not cash rich this could lead to a problem and in extreme circumstances Mr Colvin may decide to sell the shares to Mr Corbin, the Director of a rival company, to get the best deal for the family.  Clearly Mr Smith could approach the bank for finance but having just lost a key Director this may not be the best time to be asking.

There are three elements to this protection:

Cross Option Agreement

This agreement states that if the family wish to sell the shares then the remaining Directors must buy them.  Equally if the Directors wish to buy the shares, then the family must sell.

Payment Vehicle

Payment takes the form of a life policy with a sum assured equal to the value of each shareholding.  This is typically put in place through to the intended retirement age of the Directors.

Business Trust

In order to make sure that the funds are paid to the remaining Directors, the policy will normally be placed into a suitable trust.  If this is not arranged correctly the family will be in receipt of the shares AND the money, which is clearly not as intended.

Relevant Life Plans

These plans offer a tax-efficient way for business owners to provide valuable protection for their family in the event of their death. It works as a ‘death in service’ and is ideally suited to companies who don’t have enough employees to merit a Group Life Insurance scheme, or for those where the Director may have a lower salary and receive higher dividends.

Benefits include:

  • Premiums are not subject to income tax or national insurance for the employee or employer, and would also be an allowable business expense (subject to wholly and exclusively rules)

  • Level of cover typically in excess of that available in a Group Life Insurance schemes

  • Payment will not form part of employee’s income or Pension Annual Allowance

  • Benefits do not form part of the individual’s Lifetime Allowance

  • Benefits are paid free of Inheritance Tax

If you are a business owner and you wish to receive some tax breaks on your life assurance premiums then you should certainly seek advice in this area.

Employee Benefits

There are numerous protection policies that can be arranged for employees, including:

  • Group Income Protection – providing long term sick pay for employees

  • Group Life Cover – providing protection for an employee’s family in the event of death

  • Private Medical – prompt access to medical care

General Insurance

There are different general insurance policies that may be relevant, depending on the company itself.  The most common of these are:

  • Public Liability Insurance

  • Employers Liability Insurance

  • Professional Indemnity Insurance

Another, slightly less well known, policy is Directors and Officers Insurance.  This is purchased by the company and protects any of the senior leadership team should an action be brought against them personally.  Directors have unlimited personal liability under the Companies Act 2006 for the actions they take as directors of a business.  This means that their own wealth could be at risk despite the company having limited liability. 

Summary

The protection of a business, and the people within it, very much depends on the individual needs of that business.  If you are a business owner, please do take advice to ensure that any scheme you put in place is relevant, affordable and structured in the most efficient manner.  This will help ensure that your longer-term wealth plan is not de-railed by an unexpected event that sees all of your hard work and sacrifice go to waste.
 
If you would like to find out more about business protection please contact your financial adviser. If you don’t already have an adviser you can contact us.
 
*Source: BBC

This document is for information purposes only and should not be treated as advice. Content is based on current tax law and HMRC practice as at June 2017 and may be subject to change in the future. Whilst we have made every effort to ensure the accuracy of this material, we cannot accept responsibility for any consequence (financial or otherwise) arising from relying on it. 

Investing involves risk and the value of investments and the income from them may fall as well as rise and are not guaranteed. Investors may not get back the original amount invested.