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Do You Need Business Protection?


If you are asking yourself whether you need business protection, then you are asking the wrong question. Because it should not be a question at all.

Companies and partnerships all spend considerable monies on insuring assets such as vehicles, buildings and stock. They also take out insurance on loss of profits, liability, employee benefits, medical expenses and more.

So surely the most important business assets should be protected – the owner-managed shareholders?

Protecting your Shareholders

In the majority of private limited companies, the main shareholders are also the directors whose commitment and specialist skills have made the business what it is.

Without a shareholders’ agreement supported by life and possibly critical illness cover to adequately protect your business, you put yourself, your dependants and your company at major risk and leave many questions unanswered.

Did you know that a shareholders’ agreement takes precedence over company articles? But if your business does not currently have a shareholders’ agreement, you need to act now in order to protect your wealth and assets.

Don’t forget that it is important to check the company articles to establish whether pre-emption rights are stated.

Shareholder Agreements

A Share Purchase Plan sees shareholders come to an agreement that they will buy out a shareholder’s share if he or she dies. This type of plan ensures that thebusiness remains with the current shareholders, that expensive loans are avoided, that company shares stay in safe hands and that a fair value is paid for the shares.

It also protects the best interests of the beneficiaries ensuring that they receive payment without delay.

Shareholder protection allows the remaining shareholders to retain control over the business in the event of illness, death or other adverse circumstances affecting another shareholder. As soon as there is more than one shareholder of a company, you should start thinking about taking out this type of cover. 

The Benefits of Protection

With an agreement and in the event of a shareholder’s death, the company will continue and shares will pass to the estate of the deceased shareholder.

But without anything set down in official documents, there may be a number of issues in the event of a shareholder’s death. Depending on the size, age and nature of the company as well as the position of the other shareholders, potential risks could see the shares disposed of to an unsatisfactory third party, the company having to continue to support the deceased’s family or the deceased’s family left unable to realise their inheritance.

A company may also be obliged to continue to support a critically ill shareholder, which could eat into business resources over weeks, months or years.

Any surviving shareholders may automatically – and suddenly – be forced into business with the deceased’s spouse, or the deceased spouse’s future new spouse.

What about the Beneficiaries?

The beneficiaries may not want to be involved in running the company and it might be difficult for them to sell the shares. Another question might be whether the existing shareholders have the liquid assets to purchase the shares.

If the beneficiaries do wish to be involved, they may have other ideas about where the business should go; the remaining shareholders may not like their ideas or they may not want the deceased shareholder’s family to be involved in running the company at all.

This could lead to deadlock in the event of a disagreement, business collapse due to lack of direction or a bank foreclosure due to the passing of the shareholder. In all events, shareholders risk that all their hard work building up the company could go to waste.

When Should You Review Your Protection Arrangements?

If your company has existing cover in place, then this should be reviewed after any change in shareholders or other significant circumstances. After any major change, the level of cover may be incorrect, the premiums could be higher than they should be and the overall structure of the policy could potentially be replaced with more tax-efficient products.

We always recommend reviewing all of your insurance and protection policies on a regular basis to ensure that your financial plans are on the right track for your current circumstances.

While our team at Vintage Wealth Management Limited will provide informed advice on shareholder protection, it is essential for a solicitor to provide the basic shareholders’ agreement including pre-emption rights and the position on death.

The solicitors can follow up with details and a menu of optional add-on clauses to be included depending on the clients’ wishes.

Fully Comprehensive Protection

We also recommend seeking advice from our specialist team on a number of other related areas including protection policies, which will be held in trust for each shareholder and taxed on the shareholder.

These can also be paid and owned by the Company (with company buy back assuming certain conditions are fulfilled).

It is also possible to arrange a mechanism to utilise relevant life insurance but the shareholders’ agreement must link into the protection arrangements set up.

You must also make sure that your arrangements are set up in the most tax-efficient manner. This will ensure, for example, that the beneficiaries of the deceased shareholder will benefit from business property relief when they sell their shares, and that life policies pass to the other shareholders without any tax liability.

Tax-Efficient Policies

The payment of protection policy premiums needs to be tax-efficient where possible and the base cost of the shares in the hands of the surviving shareholders needs to be examined. These are just a few examples of the considerations that need to be taken into account.

It’s important to work out exactly what type of cover is best for your business. Critical illness cover can help to avoid losing Business Property Relief on your share as well as any potential Capital Gains Tax charge on disposal of your share.

Our experts can outline the difference between double and single option critical illness cover as well as further details on the range of shareholder agreements and protection options available.

We can also talk about the exceptions to any trusts being required. Contact our specialist team today on 020 8371 3111 or email for more details.

Risk Disclaimer:The information contained within this communication does not constitute financial advice and is provided for information purposes only