Shareholder Protection

Shareholder Protection is a life assurance policy taken out to protect business owners and their financial dependents in the event of one of the shareholders dying suddenly. This can be set up either as Personal Shareholder Protection, where the premiums are borne by the individual directors, or Corporate Shareholder Protection, where your Company pays the premiums.

Why does my business need it?

In the event of one of the shareholders dying suddenly, there will be issues not only for that individual’s financial dependents, but also for the surviving business partners.

For the individual’s dependents; there is an asset which may not be providing them with a return, or an income, and selling the shareholding may be preferable to getting involved in the business. Even so, they may find it impossible to sell the shares to the surviving business partners or to get a fair price.

For the surviving partners; they could be faced with a new controlling shareholder with a different business outlook, there could be pressure from the bereaved family to buy back the shareholding, bank borrowings may not be accessible so a new outside investor may be required.

What are the benefits of Shareholder Protection?

In the event of an insured shareholder dying, the proceeds of the policy are used to purchase their shares from their personal representatives, giving the financial dependents immediate value for the shares and allowing the surviving business partners retain control of the business.

How is the policy set up?

  • A shareholders’ agreement needs to be put in place which can be enforced by either party to it.  Effectively, in the event of a shareholder dying, the Company or the surviving shareholders must purchase the deceased’s shareholding, and their personal representatives must sell.
  • A life policy must be arranged for each shareholder covered under the agreement. This policy can be arranged in a number of different ways; each individual shareholder can take out a policy in trust for the others; the other shareholders can take out a policy on each individual; or the Company can arrange a policy on each shareholder. Each option has its merits and your MoneyCoach advisor can help you establish which policy is the most suitable and cost effective for your needs.

How much cover do we need?

Each policy should equate to the estimated current market value of each individual’s shareholding in the Company. You may need your accountant to provide you with a estimated valuation for this purpose.

Are the proceeds taxed?

The proceeds are not normally taxed in the hands of the policy owner where they are used to purchase shares from the deceased’s personal representatives on an own life in trust, or life of another basis. There are some tests to be met, when the Company takes out the policy, to ensure that the proceeds will remain free from tax, such as the Company should be at least 3 years old. Again, tax advice should be sought to ensure you are taking the correct option.

In certain circumstances, there could be an inheritance tax or capital gains tax liability for the deceased director’s financial dependents.

Are the premiums eligible for tax relief?

No, the premiums do not qualify for relief from either personal income tax or corporation tax

Next Steps

You need to talk to one of our advisors who will help you establish your needs and which route is the most appropriate for your circumstances. If you do not have a shareholder agreement in place you will need to talk to your accountant or solicitor to draft a suitable agreement on your behalf. The decision to take out this type of insurance should be recorded in the minutes of a board meeting.

Please contact us on 1890 428 343 and ask to speak to one of our experts on Business Protection or complete the Quick Enquiry form and we will call you back.