Follow on Google News
News By Tag
* Critical Illness
* Business Protection
* More Tags...
* Financial advice
* More Industries...
News By Location
Follow on Google News
Business Protection – Getting it right
There are numerous ways to set up shareholder/partnership protection policies. 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)
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’
To make sure the deceased partner’s family receives ‘compensation’
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.
Chartered Financial Planner
# # #
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.