The sum insured is usually based on the amount of capital the remaining partners would need to buy out their outgoing colleague’s equity in the company. The amount the business would need to pay in premiums depends on the level of risk the insurer thinks they are taking on by providing the cover. This is calculated based on the insured person’s age, lifestyle and whether they have any pre-existing health conditions. Cost will also increase if you decide to include any extras, such as critical illness cover.
STAY IN CONTROL OF YOUR BUSINESS
Losing a business partner would be bad enough. But without the funds to buy their shares, you could find someone else in the driving seat.
Not what you signed up for?
Shareholder Protection - What is it ?
Shareholder protection cover is a type of business protection insurance that provides shareholders with the necessary funds to buy shares from each other if one of them was to die or was unable to work due to a serious illness or accident. Most policies are life insurance-based but critical illness cover can also be included as an optional extra.
How does it work ?
How to determine the value ?
Valuing an unquoted company is difficult. Key professionals, principally the company accountants, should determine the most appropriate valuation method to use after reviewing the articles of association to highlight any restrictions on the transfer of shares. The size of the shareholding itself will be a factor, with a minority holding being less valuable than a majority holding. The shareholders may however, decide to disregard any discount for a minority shareholding and instead value each shareholder’s interest as a simple proportion of the total value.
There are three commonly used ways to value an unquoted company:
- Multiple of maintainable profits
A maintainable profit figure is reached by reviewing the trend of past and current performance, and considering projections of future profits. Any abnormal or non-recurring items will be excluded. This figure is then multiplied by a price/earnings ratio to arrive at a capitalised earnings figure.
- Dividend yield
This method involves applying the level of yield a buyer might require from their investment to the actual dividend produced. This will then give a capitalised value or the price per share they might be willing to pay. This basis tends to be only used for minority shareholdings.
- Net assets
Net assets shown on a company’s balance sheet are not necessarily a helpful guide to valuing the shares, unless the company is, for example a property investment company.
Is it Tax Deductible ?
There’s no specific provision in the tax legislation that guarantees corporation tax relief for the company. Instead, principles for the tax treatment were set out back in 1944 by the then Chancellor of the Exchequer, Sir John Anderson. ‘Treatment for taxation purposes would depend upon the facts of the particular case and it rests with the assessing authorities and the Commissioners on appeal if necessary to determine the liability by reference to these facts. I am, however, advised that the general practice in dealing with insurances by employers on the lives of employees is to treat the premiums as admissible deductions, and any sums received under a plan as trading receipts if:
- the sole relationship is that of employer and employee
- the insurance is intended to meet loss of profit resulting from the loss of services of the employee, and
- it’s an annual or short term insurance’
Taxation treatment depends on the facts of a particular case and the practice of the local inspector of taxes. So it is recommended that the company accountant or corporate tax adviser writes to the local inspector of taxes to gauge their views on the tax treatment. A binding decision may not be forthcoming, but perhaps they’ll gain an insight into the likely tax outcome. For example, if the inspector considers that the premiums are trading expenses, then ultimately the proceeds are likely to be viewed as a taxable trading receipt.
Shareholder Protection - What are the benefits ?
The main reason to take out shareholder protection insurance is that it can help your business out during a difficult time. The loss of a fellow shareholder through death or illness can throw a company into uncertainty.
Some of the main reasons you should take out a policy…
- If a shareholder dies without a policy in place their stake in the business could be inherited by an unwelcome beneficiary or end up being sold to a rival
- Businesses don’t need to save up capital or dip into their savings for funds to purchase an outgoing shareholder’s stake in the firm
- Having a policy in place can help ensure a smooth transition when shares are changing hands. This can help keep business disruption to a minimum
- The insured person’s beneficiaries have clarity over the amount they will receive for the company shares when they are bought out by the other shareholders
- For small businesses, shareholder protection can be vital since many smaller firms might struggle to raise buy-out capital at short notice