Business Protection – Getting it right

Jan. 19, 2012 - PRLog -- There are numerous ways to set up shareholder/partnership protection policies.  We will consider the various different types of policies which can be used in a later blog.  However this week we will consider looking at some of the key issues which need addressed when considering this type of cover.
   
Regardless of the type of plan being used, you will need some form of an agreement to know how the funds can be used after a claim has been made.  This agreement must be in accordance with the company’s Articles of Association.

How the policies are established and what they are meant to protect may have an impact on the taxation treatment of any benefits received or premiums paid.  For example, a buy and sell agreement is a binding contract on the shareholder or partner’s family to sell their share, and for the remaining partners or shareholders to buy it.  HMRC view this as a contract for sale and as such Business Property Relief for Inheritance Tax purposes will be lost. Instead of this type of agreement a single or double option agreement could be used.

Cross option Agreement

This type of agreement provides the surviving business owners with the option to buy the shares of their ill or deceased colleague usually within 6 months of the event.  If they exercise the option then the person insured (or their beneficiaries) are required to sell their share of the business to the other business owners.

Similarly, the agreement gives the insured or beneficiaries the option to sell their share and if exercised the business owners are then required to buy the share of the business back.  

As this is not a binding contract for sale there is no loss of business property relief if applicable.  If a new owner joins the business then the agreement will have to be redrawn.

Single Option Agreement

This is usually used for critical illness policies and operates in the same way as the double option agreement.  However only the insured can exercise the option requiring the remaining business owners to buy the share of the business.  This gives the control to the insured as they may have suffered a critical illness but feel that with time they can return to the business and do not want to give up their share.  Again with this being an option agreement there is no biding contract for sale and so business property relief can be claimed.

Automatic Accrual Agreements

Some types of businesses, for instance Dentist or Solicitor, require that the business can only be owned by a suitably qualified individual and therefore cannot be passed to a family member.  In this instance the partnership should use an automatic accrual agreement which states that each  partner’s share will automatically pass to the other partners on death.  

To make sure the deceased partner’s family receives ‘compensation’ for the deceased’s share of the business, each partner has a policy written in trust for their own family to cover the value of their share of the business.  Using an automatic accrual agreement, however, will mean that the share of the business will be deemed to have been in cash as opposed to shares and therefore this could lead to a tax liability.

If a partner leaves the business they can opt to carry on paying the premiums of their life assurance policy for their family’s benefit.

As you can see there are many different issues to consider and as each companies circumstances are different, which ever route is chosen it is important to seek appropriate advice.

For further information and tax planning ideas, please do not hesitate to contact us on 028 9066 8700.

Paul Dixon
Chartered Financial Planner

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Census Financial Planning is an independent financial planning practice providing a professional and comprehensive financial planning service, located on the Lisburn Road in Belfast, Northern Ireland.