Want to know if shareholder protection insurance can be written off against your tax? Read the WIS Business Protection guide to find out more.
If you operate a business in which you are a majority shareholder with minority shareholders as partners, you might want to consider arranging shareholder protection insurance at some point in the near future. Shareholder protection insurance is designed to ensure that your business remains secure in the event of something happening to you or one of your business partners.
It can cover a company in the event of a shareholder passing away or becoming critically ill (provided critical illness is covered by your specific policy). In such an event, shareholder protection insurance will pay out to the remaining shareholders, who are then in a position to purchase back the shares. This ultimately allows the existing shareholders to retain control of the business.
Individual shareholder protection and the complexity of tax deductibility
Shareholder protection insurance is one of the more complex insurance policies out there. This is particularly true when it comes to considering the tax deductibility of such a policy. There are two distinct ways to purchase shareholder protection insurance:
By taking out your own individual shareholder insurance which lasts until you retire. This is known in some cases as taking out shareholder protection insurance on a ‘life of another’ basis.
Your business can take out shareholder protection insurance policies on each shareholder, enabling it to purchase shares from the deceased with the intent of selling them to the other shareholders.
A shareholder protection policy on the ‘life of another’ basis is the least complex option. Under this type of policy, individual shareholders pay for the insurance on the life of other shareholders, from post-tax income. This usually means the company won’t pay tax on any premiums. In addition to this, the individual receives a payout to purchase the shares – not the business. This means there are no tax concerns for the business upon payout.
However, this option is only feasible when there are no more than two or three shareholders, on account of the number of plans that would become necessary otherwise. For example – a company with six shareholders would require each individual shareholder to hold five policies for the other shareholders. With large amounts of shareholders, it’s easy to see how things could potentially become unmanageable.
What happens if my business pays the shareholder protection insurance premiums?
If your business is responsible for paying shareholder protection premiums, these premiums can be claimed as tax-deductible. However, HMRC sees them as a taxable benefit-in-kind for your shareholders. This means individual shareholders would have a responsibility to pay tax on these premiums.
Cross option agreements explained
Shareholder protection insurance also requires the business and its shareholders to enter into what is known as a ‘cross option agreement’. This agreement is designed to lay out the legal terms of share purchases.
For tax purposes, the arrangement is designed so that there is no guarantee that the company will purchase the shares of any deceased shareholders in the future. Instead, the company is merely given the option to purchase the shares, while the shareholder/shareholder’s estate is given the option to sell the shares.
The reason for this is quite simple. If there is a binding contract which stipulates a sale must take place, it could have an impact on business property relief on the shares of the deceased, as far as inheritance tax is concerned. Claim proceeds are generally treated as free from tax – although we recommend seeking the advice of a reputable business accountant for further details on the complexities of shareholder protection insurance.
Find out more about shareholder protection insurance today
If you would like help and advice on how shareholder protection insurance works, or if you require instructions on how to best set up a policy based on your company structure, simply contact WIS Business Protection today. A member of our friendly and experienced team will be happy to discuss the ins and outs of each specific option available to you, and we’ll endeavour to provide you with everything you need to know about shareholder protection insurance.
In addition to this, we can also offer advice on things like key person insurance, companies life insurance, relevant life cover, business life insurance and more. We’re confident that we know our stuff – so why not contact us online or give us a call today?
