Business Loan Protection helps the business pay any outstanding borrowings such as a loan or commercial mortgage, if the person(s) covered die or become diagnosed with a specified critical illness (if chosen). In some situations the insurer is able to consider including cover for overdrafts or director loan accounts.
How does Business Loan Protection work?
Business Loan Protection is either life assurance or combined life assurance and critical illness cover written on the life of the key individual or individuals so that any money due can be used to pay towards any outstanding debt or loan. The money will be paid to the business where it is a company, Limited Liability Partnership (LLP) or Scottish Partnership. Where the business is a partnership, the policy will be written on an own life basis and may be placed in trust for the other partners.
Issues to consider
Premiums will generally be paid by the business. As a rule of thumb, the premiums will not qualify as a deductible business expense for the business. However, the benefits will not generally be treated as a trading receipt. It is important to clarify the position with the local inspector of taxes, as this may not always be the case.
Trusts are not normally required where the business is a company, LLP or Scottish Partnership; in these cases the policy can be owned by the business. Trusts may be used where the business is a traditional partnership in England and Wales. Lenders will sometimes require an assignment of a policy as security for a loan.
Key Person Protection helps safeguard a business against the financial effects of death, terminal illness, and specified critical illness (if chosen) of a key person. It is designed to provide a financial buffer in the event of a key person becoming permanently or temporarily unable to make their normal contribution to the business. Proceeds would typically be used to replace lost profit or to fund finding and hiring a replacement for the key person.
How does key person protection work?
Key Person Protection is life assurance or combined life assurance and critical illness cover (if chosen) written on the life of the key person but owned by the business so that any money due becomes payable to the employer. The business pays the premiums.
Who is key person?
Key people are individuals whose skill, knowledge, experience or leadership contribute to the continuing success of the business.
There are a number of questions your clients can ask which will help establish who the real key people are, such as:
Tax treatment of premiums
There is no direct legislation on the subject of key person policies and therefore businesses should always consult their inspector of taxes. The principles were laid out in 1944 when the Chancellor, John Anderson, made a statement around the tax treatment of key person policies.
In summary he said provided that:
A company’s tax inspector may allow corporation tax relief on the premiums.
Tax treatment of claims
Generally speaking, if tax relief has been allowed on the premiums, the proceeds will be taxed as a trading receipt. If no tax relief has been received at outset, the proceeds will not be taxed. But this is merely a general statement and will depend on the judgement of the local tax inspector.
Directors’ Share Protection provides money if a shareholding director dies or suffers a terminal illness so that the remaining shareholder(s) in the business may be able to afford to exercise an option to buy the deceased shareholder’s interest from his or her estate. Provision can also be made if a shareholder suffers a critical illness.
How does Directors' Share Protection work?
Each shareholding director takes out either life assurance or combined life assurance and critical illness cover written in trust for the other shareholders. They also enter into an agreement, typically a cross option agreement. In the event of a death or specified critical illness (if chosen) of a shareholder, the other shareholders will receive money to help buy the deceased shareholder’s share. The business would usually pay the premiums and this is a taxable benefit on each individual shareholder.
Key issues for shareholders to consider if no protection is in place
Where the shares have passed to the estate, the beneficiary(ies) has two main options:
If the beneficiary(ies) of the deceased sell their interest in the company, the remaining shareholder(s) may find themselves working with an unwelcome new shareholder.
Cross Option Agreement
A written agreement, known as a ‘Cross Option Agreement’, is a reciprocal arrangement that helps the surviving shareholders retain control of the business, by providing an option to buy the interest of any shareholder who dies. Similarly, it also provides the estate of the deceased with the option to sell to the remaining shareholder(s).
The shareholding directors will typically pay the life assurance premiums themselves and will not get income tax relief on those premiums. Where the arrangement is on a commercial basis there will be no inheritance tax on the payment of the premiums to the policies. Where policies are in trust, any proceeds will not normally form part of the shareholder’s estate for inheritance tax.
Each shareholder may request that the life assurance company issues the policy on their life under trust for the benefit of the other shareholders.
A tax efficient benefit for employees or directors of a business that can provide the same protection as the life cover taken out by individual directors.
What is the Relevant Life Plan (RLP)?
A tax efficient, single life, ‘Death in Service’ benefit for employees or directors of a business. The policy proceeds are paid to the Trustees (employer) and the benefit is written under Trust for the life assured’s beneficiaries.
To be eligible for a Relevant Life Plan, the employee must be:
Relevant Life Plans are particularly aimed at:
Consider: how many directors are paying for life cover from their net income when it would be more tax efficient to use a RLP to provide the same cover?