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        Updated: April 22, 2024

        Shareholder Protection Insurance and Taxation

        Want to know more about the tax rules for Shareholder Protection? This guide will outline everything you need to know

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        We can help! We know everyone's circumstances are different, that's why we work with brokers who are experts in shareholder protection insurance. Ask us a question and we'll get the best expert to help.

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        Shareholder protection is an extremely valuable safeguard for a business in the event of an owner’s death, providing immediate financial assistance for the surviving shareholders to purchase any shares bequeathed to a beneficiary.

        In this article we take a closer look at the potential tax implications which may arise for either a business or an owner who has purchased a shareholder protection insurance policy.

        Taxation implications of a shareholder protection insurance policy

        There are a number of tax implications a business needs to consider when purchasing a shareholder protection insurance plan, such as:

        • What are the potential income or capital gains tax liabilities, if any, from the proceeds of a policy?
        • Are the beneficiaries liable for any inheritance tax liabilities?
        • Who should pay the premiums – the business or the life assured?
        • Do premiums qualify for any tax relief?

        Income tax

        In the event of the death of a business owner, any proceeds from a shareholder protection policy will be paid to the surviving owners free of any personal income tax liability.

        The only potential income tax liability which may arise from a shareholder protection policy relates mainly to the payment of premiums and whether this cost is covered either by the business or the life assured (covered in more detail below).

        Capital gains tax

        The proceeds from a shareholder protection plan are typically free from any capital gains tax (CGT) liability.

        A CGT liability would only exist if the value of the shares passed to a beneficiary were to increase between the date they were bequeathed to them (upon the death of an owner) and the date when they were sold back to the surviving shareholders.

        In reality, this would be quite rare as most shareholder agreements would stipulate a specific valuation of an owner’s shares in advance, therefore, negating the possibility of any increase.

        Inheritance tax

        The most effective way of avoiding any potential inheritance tax liability would be to stipulate within a shareholder agreement the requirement for any insurance policy to be written into an appropriate trust for the benefit of the surviving business owners.

        On this basis, any proceeds from a shareholder protection insurance policy would be paid directly to the trustees rather than the deceased’s estate or to the remaining owners.

        Premiums for life policies which are written in trust can, potentially, be regarded as lifetime gifts for inheritance tax purposes in the UK. However, HMRC tends to view shareholder agreements as reciprocal commercial arrangements and would, therefore, disregard such payments for gifting purposes.

        Corporation tax

        In the event of a lump sum payment, a business would not be liable for any corporation tax on the proceeds from a shareholder protection policy.

        If a company pays the premiums for the life policy on behalf of its shareholders it is able to claim these payments as legitimate business expenses for both corporation tax and national insurance purposes. However, this may cause a tax liability for the shareholder (see below).

        If you’d like to discuss any aspect of the information outlined above in more detail with a professional tax expert, give us a call on 0808 189 0463 or make an enquiry and we will arrange for an advisor we work with to get in touch.

        Speak to a expert today

        How are shareholder protection premiums treated for taxation purposes?

        As mentioned above, if the premiums for a shareholder protection policy are paid for by the company then they qualify as a business expense for taxation purposes.

        However, because the business would be paying the premiums on behalf of the owners, they would then become personally liable for income tax and national insurance on these payments.

        Will my policy be classed as a p11d benefit in kind?

        Yes it is, if the premiums for the policy are being paid by the business on behalf of the shareholders.

        In most cases, the shareholders pay for the premiums relating to the policy taken out on their own life. On this basis, the life policy would not be classed as a p11d benefit in kind. This also means tax relief is not available for shareholder protection insurance.

        Speak to a business insurance expert

        Shareholder protection can provide crucial financial support for a business, however it’s important to have a clear understanding of any potential tax implications which may arise. This is where we can help.

        The advisors we work with can discuss the tax treatment of this type of life cover with you in more detail. All advice is free and any information is always given in the strictest confidence. Call us on 0808 189 0463 or make an enquiry to get started.

        Ask A Quick Question

        We can help! We know everyone's circumstances are different, that's why we work with brokers who are experts in shareholder protection insurance. Ask us a question and we'll get the best expert to help.

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        Richard Angliss

        Richard Angliss

        Finance Expert

        About the author

        Richard Angliss has made a career in financial services which stretches over 40 years.

        His early career was spent learning about the various financial products and applying them to prudent advice, working for one of the largest life assurance and investment firms. After that he joined the financial services arm of a very well-known firm providing independent advice to their 8 million customers.

        For the last 20 years he has been involved in building software solutions that help Advisers and clients work together to achieve good financial outcomes and helping to set up three independent advisory firms. He also has written many articles for financial services publications and provided commentary for newspaper journalists.

        At an early stage in his career he realised the great satisfaction that comes with being able to help people achieve their goals and protect their families. “Regulation of financial services has hugely impacted on ensuring people get appropriate advice. The issue these days is access to that advice and just as importantly regular reviews to make sure that everything stays on track”.

        With the growing development of online resources such as Online Money Advisor he sees a great future for people to access advice to make their pension and investment work harder for them.  Plus, of course, to ensure they have insurance products in place that will be required when unforeseen events happen.

        He knows getting that balance right is crucial to prudent financial planning and the wellbeing of individuals and their families.

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