Passing on a business to the next generation can be fraught with problems, some of which are business-related, such as whether the chosen successor is suitable or experienced, and some of which are financial.
But if the person in charge dies suddenly their share is often left to a spouse who may not want to run the business.
What types of protection cover are there to help other directors buy the share out and to ensure the long running of the business?
When insuring the owners of a business for life insurance there are some key things to be aware of, Kathryn Knowles, managing director at Cura Insurance, explains.
The main insurances are key person cover, shareholder protection, relevant life insurance, business loan protection and partnership protection, but there are three main ones to look at, Knowles says.
Key person
- Arranged to help the company cope financially with the loss of a key person.
- There is usually no point in arranging this for someone with more than a 5 per cent shareholding in the company. The Anderson principles dictate that you cannot access the tax advantages of this policy if you do so, unless you get specific permission from the local tax officer.
Shareholder protection
- Arranged to help the company pay the next of kin a fair value for the shares that the deceased owned.
- Usually arranged under a cross-option agreement or buy-back option. There are key technicalities for the premiums and how the claim is handled, depending upon which way this is set up.
Relevant life insurance
- Arranged as a thank you to an employer of the company (this can be a director).
- This needs to be about a thank you for the service they have given to the company, it cannot be specifically arranged to cover a personal liability (though the next of kin might choose to use it to pay off a mortgage).
Knowles says: “There are a lot of tax implications on all these different types of cover, and this is just life at the moment, we haven’t even touched on the exec IP.
“It’s a very complicated area and it’s the area that firms engage with me most to train them on. Lots can go wrong.”
Ian Smart, product architect at Royal London, explains that where the business is structured as a company, a partnership or a limited liability partnership, insurance can be used to provide the other owners with funds to buy the shares of a shareholder or partner from their family.
Alongside the insurance policies there will also be a cross-option agreement, which gives the surviving owners the option to buy and the family the option to sell the shares in the business.
The policies will typically be taken out by each owner on their own life and put under trust for the benefit of the other owners.
This makes sure that if an owner dies, the benefits of the policy can be paid to the other owners quickly and usually free of any taxation.
