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Shareholder/Director Protection

The financial planning requirements of a business owner can be very different to those of their employees. We realise this and offer a tailored service to manage your personal financial planning needs. After all, we also run a Company so we understand the issues you face!
Provided that the Company produces more than enough profits to meet the income needs of the owners, the disposal of the surplus is largely a matter of tax planning.

In brief, it is possible to reduce your corporation tax, income tax and even National Insurance liability by careful use of pensions. At the same time you can create a private fund that can lend money to the Company (as a very attractive alternative to Banks, and in to which all your interest payments go straight back into your pension fund), buy corporate property, and even be used to smooth the transfer of the company from the older to the younger generation.

The actual detail as to what can be done for your own Company and objectives depends on many factors, including the ages of the controlling directors, their individual aims, their existing pension arrangements and the resources available to build the fund.

We can assist you with ‘Shareholder Protection’. The shareholder/directors in limited Companies – and indeed, members of partnerships – often need protection against the impact that the death of one of the shareholder/directors or partners might have on the financial viability of a business.

In general, most small Companies provide in their deeds or Articles of Association that, on the death of any one of the principals, the others will have the right to buy them out – usually at a pre-determined price, or on an agreed basis. This is logical, since those who have invested time, money and effort in a business will often be reluctant to see a fresh face – however well intentioned – moving in to replace a valued member of the team, simply through inheritance. New ideas can be a good thing, but not if they adversely impact on the status quo at a time when the Company has enough hurdles to overcome, as the result of the unexpected loss of a prime mover.

For this reason, partners or shareholders can arrange life assurance based on the amount that would have to be raised in order to “buy-out” the deceased participant’s share in the business. This way the death of a shareholder will trigger a payment adequate to meet the cost of buying the deceased’s share of the business from their beneficiaries. This sort of arrangement will include all partners or shareholders and will be reviewed on a regular basis to take account of any change in value of shareholding.

Life assurance policies can either be written on a “cross-life” basis, where each principal takes out a policy on each of the others, or by each principal on his or her own life, for the benefit of the others, under trust.

It is most common to use level term assurance for this purpose, possibly with a conversion or extension option. However, there is some merit in considering increasing term assurance, since the value of the business is likely to rise with time and a degree of “inflation proofing” at outset could save time and effort later on.

You may also wish to consider ‘Keyman Risks’.  As a Company you insure your cars and your equipment against disaster like fire and flood, and include compensation for loss of profits as well as asset replacement, but do you insure your Company’s cash flow against loss of key members of staff to death or disease?

It is often a good idea to draw up a list of your Key People who, very broadly, are those whose skills are such that no one else could step into the breach should they die suddenly. In most Companies Key People would be the directors, the star salesmen, business drivers, and possibly certain technical staff.

Ask yourself what sort of damage their loss would entail. This can range from the catastrophic (in the event of the death of an owner director this can result in the calling in of all debts, bank overdrafts etc and subsequent failure of the firm) to the difficult (the death of the top salesman may cause a new business famine and subsequent cash flow difficulties) to the merely expensively inconvenient (e.g. hiring a consultant locum at £500 a day for several months while a new person is recruited).

If you consider that you have a potential problem then you can insure against it using Key Person policies. We can help conduct an audit for you and assess what sort of coverage you might need.

To discuss further please contact us.

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