Having worked hard to build up your business, protecting it has to be a priority. Typical covers such as employer liability and professional indemnity tend to be standard for small business, but as your organisation gets more complex, so do your insurance needs. So at what stage does shareholder protection become a prerequisite? Simon Claxton, MD of Macbeth Insurance financial services, explains.
You need shareholder protection when…
The need for shareholder protection kicks in as soon as two or more shareholders are in place, so often from the word go. This means that should something happen to one shareholder, surviving owners have the capability to retain control over the business rather than having to involve someone who is unwilling or unable to contribute to it, or worse, potentially detrimental. At the same time, it ensures that the deceased’s beneficiaries are provided for.
What is a cross/double option agreement?
A cross/double option agreement gives the surviving owners the option to purchase the deceased’s interest in the business. The personal representatives of the former shareholder then have the option to sell to the surviving owners. If either party chooses to exercise their option, it becomes a done deal.
“Own life” life policies must be placed under trust
This is because proceeds would otherwise be paid to the deceased’s estate and there could be inheritance tax issues. The remaining shareholders need these funds to meet their obligations under the double option agreement; an appropriately worded trust will help them achieve this tax efficiently.
There are exceptions to trusts being required
If your business has, and only ever will, have two owners, you may opt for life policies on each other’s lives (on a ‘life of another’ basis). This means the surviving owner receives the sum assured under the life policy, but without the need for a trust.
Also, if the business owners are closely related, HM Revenue & Customs (HMRC) may judge that a business protection arrangement involving trusts is not a purely commercial arrangement. Again you can avoid this through “life of another” policies.
Consider a single option for critical illness purposes
In the event of critical illness, there is still a possibility that you or your business partner could make a full recovery and want to come back to the business. You may also want to avoid a potential CGT charge on disposal of your share, or not lose Business Property Relief which may be available on your interest in the business but wouldn’t if it was sold. If a double option agreement has included critical illness, the other owners of the business could force you to sell your share. A single option that covers critical illness protects you from this.
Simon Claxton is the MD of financial services at Macbeth Insurance.
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