Chris Plews: Let’s get down to business
In the UK around 95 per cent of Britain’s 4.9 million private businesses employ less than 10 people. While 75 per cent are sole proprietors, another 20 per cent 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 (SMEs) 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: Relevant Life, Key Man and Shareholder Protection plans.
Relevant life plans are a good way for an employer to arrange life cover on the life of an employee, with benefits going towards the employee’s family or financial dependents.
With these plans, businesses 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).
For employees, not only do they not pay tax or national insurance on the premiums, the business also pays the premiums.
Beneficiaries are written into a trust so there are no immediate income or inheritance taxes. A Relevant Life Plan doesn’t count towards a lifetime pensions allowance, which is currently capped at £1,073,100 for the tax year 2020-2021. Tax only becomes an issue if assets remain in trust beyond a tenth year.
Relevant life plans can be a way to make a business more competitive in order to retain experienced staff and attract new talent. While employees are less likely to leave in an economic downturn, an upturn can mean they may start looking for somewhere bigger or better.
Employees who feel valued are likely to become more productive, loyal, and happier – happy employees are critical to the success of a business. Reviewing a company’s benefits package to make sure it’s competitive is a good first step towards protecting a business.
Shareholder or partnership protection is critical to ensuring that the business can continue with minimal interruption, if something happens to a shareholder.
The law doesn’t regular how and when a shareholder can transfer their shares – any rules need to be contained in a shareholder’s agreement.
A business might not have debts or key people, but they should all have a shareholder or partnership agreement in place that clearly sets out what would happen if a business owner became unwell or even died.
If 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 Scottish law, which means that their assets (including their shares) may end up in the hands of someone they might 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 may not want to contribute and would prefer to sell their interest. Without a plan in place for the surviving business owners to fund the purchase, this can be far from a smooth transition.
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 instances of:
- Conflicting views about the future direction of the company between or among the existing owners
- 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)
- 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
- Creation of a ‘market’ for private company shares
Key person protection
Losing a key person in a business can be catastrophic for many reasons – loss of contacts, revenue, or costly recruitment fees. Costs can be exacerbated if business loans are in place, particularly if a business owner has given a personal guarantee.
Without key person or loan protection in place, this could quickly result in the demise of a business.
Key person protection is a life insurance policy for the life of the key person and owned by the business. It’s 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.
Each of these business protection plans can help protect both employees, employers and the business itself. Gilson Gray has a large team of specialists who can assists with all needs of a business, from setting it up to selling it on or restructuring it.
Chris Plews is a financial adviser at Gilson Gray Financial Management