Shareholder Protection Insurance and Taxation
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.
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?
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.
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.
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.
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.