If one of your fellow shareholders or partners dies or suffers from a severe illness, your business may well be faced with serious questions about retaining control among the other shareholders or partners. At the same time the beneficiaries of your deceased business partner will expect a fair value for their interest in the business.
Many businesses will have insurance policies in place to produce the necessary cash. However, equally important is making sure that this cash is available in the “right” way, at the “right” time for the “right” people and the business. It is this latter issue that may need particular attention. From time to time we find that the cash is not available for the “right” people and often crucially (inadvertently) the business does not benefit at all.
We can help make sure your business is best protected to deal with the consequences of (unforeseen) deaths and illness whilst making sure the interests of shareholders/partners and their families are not forgotten.
What are we talking about?
The insurance policies referred to above might go under a whole gambit of names: “shareholder protection”, “partner protection”, “keyman”, “group life assurance” or anything else. The policy (as with any policy) is in simple terms a method of producing cash on the occasion of a certain agreed event happening. The perhaps more important issues (and questions) are then where does that cash go, for whose benefit and who is in control of the cash?
What is involved in making sure the business and others are protected?
It is fundamental that various strands “come together”. This primarily revolves around the policy itself, the Articles of Association or Partnership Agreement, any Shareholder Agreement, any trusts operated by the business and the personal arrangements of shareholders/partners and their families/loved ones. It is crucial that these strands are properly intertwined. What governs the basis upon which the cash generated from the policy is held and distributed? Do these conflict with each other? Or worse, do any of the legal arrangements in place cause unnecessary financial stress on the business to access the required cash? Do the arrangements in place cause unnecessary emotional and financial stress on family members together with unnecessary tension between the business and the family of the deceased shareholder/partner?
What about tax?
Yes, tax is always important. It appears that sometimes it is (slightly) overlooked in these arrangements. The two main issues we see are:-
1. accidentally turning a 100% relievable asset for Inheritance Tax (under Business Property Relief) into a 40% taxable asset; and
2. not drafting certain trust arrangements properly meaning that 40% of the policy proceeds are due to the government in Inheritance Tax.
Tax should not drive everything, but must not be forgotten when trying to achieve a particular commercial objective.
We can help
It sounds trite and clichéd, but a “joined up” approach is really needed. To keep with the clichés, a “silo mentality” means that the individual elements of this “protection” might appear effective, but taken as a whole the “wrong” people may be paid while suffering the “wrong” amount of tax achieving the “wrong” end result. We also fully appreciate the importance of working alongside other professionals such as financial advisers (for, of course, we cannot and do not seek to provide financial or investment advice) to make these arrangements work. With a team approach across Corporate, Personal & Family and Employee Benefits, we can assist you and your business to make sure the strands really do come together and where “patching” is necessary this can do done with minimal disruption.
This blog was written by Alan Eccles.
To discuss the issues further, please get in touch with your usual contact at Brodies or
Shuna Stirling- email@example.com or 0141 245 6201
Nigel Watson- firstname.lastname@example.org or 0131 656 3720
Eric Galbraith- email@example.com or 0141 245 6253
Alan Eccles- firstname.lastname@example.org or 0141 245 6255
On August 6, 2015