Let’s get down to business

In the UK around 95% of Britain’s 4.9 million private businesses employ less than 10 people¹.  While 75% are sole proprietors, another 20% have up to only nine employees.  This means that many of these businesses are not in a position to implement a Group Life Protection scheme, or Death in Service scheme. These larger plans are expensive and administratively burdensome.

However, small and medium enterprises can benefit from three key business protection plans that can be put in place to protect individuals and businesses. These plans are structured in a cost more effective way and are known as the: Relevant Life, Key Man and Shareholder Protection plans.

Relevant Life:

Employing the right staff can be critical to the success of a business. While employees are less likely to leave in an economic downturn, an upturn can mean they will look for somewhere bigger or better. Employees that feel valued are also likely to be more productive.

Reviewing the company employee benefits package to ensure it is competitive can help to both attract new talent whilst also retaining existing experienced and knowledgeable staff. This could include benefits that provide financial support in difficult times, such as income protection, critical illness and life insurance or others that promote good health such as medical cover.

A company could also consider a tiered approach, such as offering a Relevant Life Plan for more senior or specialist employees who are more likely to be affected by the Lifetime Allowance.

The Employee

• Business pays the premiums
• Not treated as a benefit in kind, so employee does not pay tax or National Insurance on the premiums

The Beneficiaries

• Written into trust so no immediate Income Tax or Inheritance Tax
• Does not count towards lifetime pensions allowance (capped at £1,073,100 for tax year 20/21)
• Tax will only be an issue if assets remain in trust beyond a 10^th anniversary

The Business

• Can usually claim Tax Relief on the premiums, but
• Must meet ‘wholly and exclusively’ rules (i.e. be for the purpose of trade as part of the employee’s remuneration

Shareholder protection:

The law does not regulate when/how shareholders transfer their shares. Any rules or restrictions that you want to apply need to be contained in the shareholders’ agreement. A business may not have debts or key people, however they should all have a shareholder or partnership agreement in place which clearly sets out what would happen on the death, illness or disability of a business owner.

When a business owner dies, their ownership of their shares will usually be distributed in accordance with their will or other testamentary writing. If the business owner dies in Scotland without a will their estate will be distributed in accordance with the Scottish laws in force at that time, which means that their assets (including their shares) may end up in the hands of someone they do not wish to benefit.

Normally, on the death of a business owner the beneficiaries of the estate will usually be their family. However, they may have no experience in running a business, and/or may not have a desire to contribute. As such they are likely to want to sell their interest, but without a plan in place for the surviving business owners to fund the purchase this can be far from a smooth transition. Shareholder or partnership protection is critical to ensuring that the business can continue with minimal interruption.

Share Protection allows the remaining partners, shareholding directors or members to remain in control of the business following the death of a business owner. Share Protection is critical for family businesses and can help protect against the following situations:

• Where there are conflicting views about the future direction of the company between or among the existing owners;
• Where there are tensions within the family that could jeopardise the future running and viability of the business;
• The temporary or permanent incapacity of a director or shareholder (such as a stroke or heart attack); or
• Where the owners of the business are married or in a civil partnership and are going through a separation or divorce.

Any of these issues can disrupt a company, but by having shareholder protection in place the interruption to your business will be minimised by enabling:

• Business Continuity;
• Funds being made available to the individuals who wish to buy the shares;
• An improved tax position on the death of a shareholder;
• The deceased’s estate to receive funds in a timely manner; and
• Creation of a ‘market’ for private company shares.

Key Person Protection:

The impact of losing a key person in a business can be catastrophic due to a loss of contacts, revenue or costly recruitment fees. Furthermore, costs can be exacerbated if there are business loans in place, particularly if a business owner has provided a personal guarantee. Without key person or loan protection in place, this could quickly result in the death of the business.

Key person protection is intended to cover future loss of profits, so a lump sum received by the business at this time could be critical to ensure continuity of the business.

Gilson Gray have a large number of specialists that can assist with all needs of a business be it setting it up, selling it on, restructuring it or providing guidance and advice.

Office for National Statistics, weekly provisional figures on deaths registered in England and Wales (February 2014).

If you would like further information on the topic discussed in this blog, please contact:

Chris by email: cplews@gilsongrayfinancial.co.uk 

The information and opinions contained in this blog are for information only. They are not intended to constitute advice and should not be relied upon or considered as a replacement for advice. Before acting on any of the information contained in this blog, please seek specific advice from Gilson Gray Financial Management.