Why might share purchase protection be needed?
When the co-owner of a business dies or becomes ill, the business may want to buy back their shareholding to prevent others becoming involved. Share purchase protection ensures that they have the funds to do this.
How is the level of protection set?
The benefit should relate to the value of the shares held by the person insured. This should be based on a professional valuation. Therefore, regular revaluations should be carried out and the level of cover changed accordingly.
Can a company apply for share purchase protection?
In private companies, major shareholders are often actively involved in the business. A share purchase protection policy offers a way of ensuring that their shares don't pass into unfavourable hands, but it is also appropriate to any other shareholder.
Can a partnership apply for share purchase protection?
Yes. Normally, when a partner dies the partnership is dissolved and the beneficiaries of the deceased are entitled to the value of their interests in the business. A share purchase protection policy can be used to provide funding so that the value of these interests can be paid out without damaging the business.
How are premiums paid?
In companies, the premiums can either be paid personally by individual shareholders or by the company itself. In partnerships, the individual partners pay the premiums, although there are ways of splitting the costs fairly.
What are the tax implications of a share purchase protection policy?
There are a number of scenarios for tax under share purchase protection. If the company pays the premiums, these will often qualify for tax relief as part of a director's salary package. However, these are then treated as part of the shareholder's gross salary and will be subject to income tax and National Insurance contributions for the shareholder.
What are the inheritance tax (IHT) implications of a share purchase protection policy?
If the arrangements between the co-partners or co-shareholders are established on a commercial basis so it's viewed as a true business arrangement, the premiums paid are not gifts or transfers of value for IHT purposes. Therefore, proceeds from the policy will probably not be subject to IHT.
Does capital gains tax have any effect on share purchase protection?
Our business protection trust can only be used with new policies in order to avoid capital gains tax that would be enforced on an existing policy put under trust as part of a 'commercial' arrangement. If a critically ill partner or shareholder exercises their single option agreement to force the co-partner or shareholder to buy out their share, this buyout is treated as a disposal for capital gains tax purposes.
This information is based on our understanding of current taxation law and Revenue practice, which may change. The value of tax relief depends on your financial circumstances.
Next steps
If you would like more information about our share purchase protection, you should talk to a financial adviser.
Further information... Who should I talk to?
Speak to your financial adviser to find out more. If you don't have an adviser, the IFA Promotion Service or the Society of Financial Advisers can help you find one.
