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Shareholder protection insurance is designed to protect the business against the risk of exposure to unwanted outside involvement should a key shareholder die, become critically or terminally ill.

Shareholder protection should be put in place alongside an agreement between the shareholders (known as a cross-option agreement) which sets out the steps taken if a shareholder passes away. It facilitates the sale of their shares to the other shareholders and the insurance provides the funds they need to purchase them from the estate of the deceased or seriously ill shareholder. The agreement will usually state an agreed valuation for the shares in advance, in order to determine a figure for the sum insured and, therefore, the amount paid in the event of a claim.

Why Does My Business Need Shareholder Protection?

Families of the shareholder – Families of the deceased are often not involved with, or capable of working in, the business. Therefore, in most cases the remaining shareholders and families would prefer to have the shares purchased, as the monetary value will be more useful to the family than shares in a privately owned company. If they cannot be purchased by the remaining shareholders, they could be stuck with an asset that is illiquid and the remaining shareholders may begrudge their involvement if they contribute nothing to the business. Shareholder protection insurance means that shareholders can be safe in the knowledge that should something happen to one of them, their families will inherit the value they have created in the business and the remaining shareholders still control the business.

Business security – If the business fails to make plans for the purchase of shares upon the death of a shareholder, it can leave the business in a situation of great uncertainty. The shares could be vulnerable to being purchased by a competitor, for example. This may be something the remaining shareholders wish to avoid. With shareholder protection, the shares will be purchased by the remaining shareholders, providing the continuity and control they desire.

Lack of funding available – When a shareholder passes away or is diagnosed as critically ill, it can be a huge shock to the business. Most companies and their shareholders will struggle to find the funding to purchase the shares at such short notice. Shareholder protection means the payment to purchase the shares is funded by the proceeds of the insurance policy.

If We Already Have Key Person Cover, Why Do I Need This?

The primary difference between key man cover and shareholder protection is who receives the payment. Key person insurance provides a lump sum to the business and is necessary to get the business back on its feet, to recruit a new member of staff, to provide security to creditors, and any other costs which may be incurred due to the loss of a key individual. Shareholder protection ensures the families of the shareholder inherit the value of their shares, and the control of the business is secured by the purchase of the shares for the remaining shareholders.

What Is The Tax Position For Shareholder Protection?

Whilst there is no tax relief on the premiums paid for shareholder protection as premiums paid by the business cannot be classed as a business expense, the payment of the sum insured will be tax-free. It’s important the shareholders pay the premiums for this treatment to be applied because if the company pays the premiums, it could be treated as a benefit-in-kind (P11D) upon the policyholders, and if the payment is made to the business, the payment could be treated as a business receipt and potentially liable to corporation tax. Therefore, it is important to get advice and make sure the arrangement is set up correctly or it could have costly consequences.


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