Business Protection is remarkably straightforward. It’s really three areas… and that’s it.
Step 1: the Relevant Life Plan
The first thing we do is ask you if you’ve got Life Cover set up, and if you do, we ask you if you’re paying for it personally (i.e. from post-tax income, a Direct Debit from your own bank account).
99% of the time, the answer to that question is “Yes, that’s exactly how we’re doing it”.
Well, there is a little-known, extremely dull part of the tax code which says a Limited Company can pay for Life Cover, for the benefit of the Directors (or any other senior staff member), and it’s not a Benefit In Kind. Just like employees of big companies get pension contributions and Death in Service.
The premium is usually deductible against your top line, so it works like any other allowable expense: you save Corporation Tax, as well as the tax you pay on drawing the income out to pay the premium in the first place.
So Step 1 in our process couldn’t be simpler – let’s see if we can get the business to pay for your life cover. It saves you a ton of money.
Step 2: Shareholder Protection
Second Step, and slightly more complicated (but not much).
If you’re in business with someone else – just like we are – then you’ll each have shares. Or if there’s three, or four, of you, the same applies. To keep it simple, let’s use a company with 2 directors who are equal 50/50 shareholders, just like me and Richard.
If he were to die tomorrow, we’d all be very sad. But not as sad as his wife would be when she realises she’s now a 50% shareholder in a Financial Advice business! Richard’s wife is lovely, but she’s a rubbish Financial Adviser. I’m pretty sure we’d be less than optimal at working together.
So what’s the best option?
Shareholder Protection is, at its heart, simply an agreement between shareholders what happens to their shares should one of them die.
To use our business as an example. We’ve agreed that if Richard dies, I buy his shares from his wife. She gets the value of the shares, she doesn’t have to train up as a Financial Adviser, and I retain control of the business. Win-Win.
But not so fast! What if I don’t have the money to buy Richard’s shares from his wife?
The ‘Protection’ part refers to the Life Cover we’ve taken out on each other, to make sure we have the money to fulfil our agreement.
If he dies, the insurance policy pays out, and I have the money to buy the shares from his wife.
Easy as that really.
There are endless complexities that I have neatly avoided mentioning – stuff like Cross Option Agreements, Company Share Buyback, the impact on the surviving shareholder’s CGT position… But at least you know the basics.
So that was step 2. Covering off what happens to shares if the worst happens – trying to protect everyone’s interests, as well as the future of the business.
The final step, step 3, is something called Key Person Insurance
Step 3: Key Person Insurance
Key Person Insurance benefits the business. If you lose a business partner, or shareholder, or key staff member to death or illness, this cover is all about making sure the business survives.
Me and Richard again… he’s dead, the Shareholder Cover has paid out – I’ve bought the shares from his wife. But I now have twice the work to do and no time to do it.
If we’d had a Key Person Insurance policy on Richard, the business would receive the money from the policy. With this money the business can hire someone else. Or I can pay for his work to be outsourced. And the money can go some way to replacing the profit the business missed out on while we were recovering from the shock of his demise.
So that’s it really – Key Person Insurance is there to protect the business. It gives the business a cash injection at a time of massive stress.
And it doesn’t just have to be a director or shareholder. Have a look round your office and consider what the business impact would be if you lost your top sales guy, or your MD, or your head of HR…
So that’s it – Business Protection in a nutshell. Three areas to think about – at the cross section of your personal financial plans and your plans for your business. We know only too well how the boundaries between the two are blurry, even indistinct.
Business Protection is well worth discussing with someone who knows their onions. There are loads of little tips and tricks to be aware of – and to be honest when we set these plans up we spend as long explaining them to the accountant as we do to the business owners.
Lovely thing about these plans is that once they’re done, you can stick them in a filing cabinet for 5 years and not worry about them. Until the business changes beyond recognition, or you sell for millions…
Don’t hesitate to get in touch if you want to have a chat. We’re delightful chaps and we love this area of the business.
