Business people looking out of their office windows
Protection planning for businesses
Phil Smithyes
31/01/2017
Business people looking out of their office windows
Ensuring that you and your business are covered for the unexpected.
Business Loan Protection|Directors Loan Protection

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

  • The loss of the individual or individuals who have guaranteed a loan.
  • If an overdraft, loan or commercial mortgage is unable to be paid, it has serious implications for the business.
  • Director loan accounts should be repaid on death: where will this money come from?
Tax

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

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

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:

  • Which sales person would they least like to lose to the competition?
  • Have any executives been expensive or hard to recruit? (If so, they could be equally costly and difficult to replace).
  • Who is the person with the most valuable contacts?

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:

  • The sole relationship is employer/employee
  • The cover is for loss of profits
  • The policy is a short term assurance.

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.

Share Protection

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:

  • a beneficiary(ies) could take over the deceased’s position as a shareholder
  • the beneficiary(ies) could realise the value of the interest by selling it.

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).

Tax

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.

Trusts

Each shareholder may request that the life assurance company issues the policy on their life under trust for the benefit of the other shareholders.

Relevant Life Plans

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.

  • The business pays regular premiums based on the level of cover.
  • If the person covered dies or is diagnosed with a terminal illness whilst in employment during the term, the plan pays a fixed, one-off lump sum.
  • The plan is designed to meet certain legislative requirements so that the premiums, benefits and options should be treated tax efficiently.

To be eligible for a Relevant Life Plan, the employee must be:

  • a UK resident
  • an employee of a business that resides in the UK, for example, directors on PAYE and salaried partners.

Relevant Life Plans are particularly aimed at:

  • employers who wish to provide Life Cover for specific employees (for example high earners and directors) above those available in an employer’s group scheme
  • employers who are unable to take out group cover for their employees (for example the employer may have too few employees to be eligible for a group scheme).

Key facts

  • A Relevant Life Plan is an individual Death in Service plan.
  • The policy is available to employees, which can include Directors of Limited Companies on PAYE.
  • RLPs are not available for partners, members of a Limited Liability Partnership (LLP) or sole traders.
  • RLP is taken out by the employer on the life of the employee.
  • The plan cannot go beyond age 75.
  • The plan can only provide life cover and no additional benefits (other than terminal illness benefit during employment).
  • The plan must be written under a discretionary trust. The beneficiaries of the trust are the family of the person covered.
  • Benefits from the policy should be paid free of inheritance tax
  • Premiums for a RLP can often be viewed as an allowable business
    expense by HRMC so the premiums should qualify for full income tax relief, national insurance relief and corporation tax relief.
  • The premiums and benefits do not count towards annual or lifetime pension allowances because RLPs are not registered group schemes and do not come under pensions legislation.

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?

Contact us

Phil Smithyes
Phil Smithyes
Partner, Head of Financial Planning
Thames Valley