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Shareholder Protection

If there are several shareholders in your Private Limited Company, you are part of a Limited Liability Partnership (LLP) or a partner in a formal partnership, have you thought about what would happen to the shares of share of the business should a shareholder or partner be taken critically ill or pass away?  Could you, or the business, afford to purchase the shares or share of the business?

If not, there could be significant implications for the future of your business. Shareholder protection can help you protect the ownership rights, and the future direction of your business.

A share protection agreement enables the surviving owners/shareholders to purchase the deceased owner's share of the business from the deceased owner's estate and ensures that the deceased owner's dependants have a willing buyer and cash instead of a share of the business.

Business Meeting at Small Table

How does it work?

In the event of a business owner dying, being diagnosed with a terminal illness (life expectancy less than 12 months after diagnosis) or a specified critical illness*, shareholder protection can provide a lump sum to the remaining business owners or partner(s).

Therefore, if a valid claim is made during the term of the policy, the lump sum could be used to help purchase the deceased partner, shareholding director, or member’s interest in the business.

*Critical illness cover must be purchased at an added cost to cover diagnosis of critical or serious illness

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What's the process?

01

ENGAGE

02

CONSULT

03

RECOMMEND

04

APPLY

What are the benefits?

You stay in control of the business by preventing the shareholding being inherited by an unwanted beneficiary, whose priorities may not align with those of the business.

You can reduce disruption during a testing time for your business by making the transfer of shares as smooth as possible.

You have the flexibility of coming to different agreements on how to manage the shares; for example, owners could buy shares back from a shareholder who’s diagnosed with a critical, serious or terminal illness.

You can avoid having to access costly buy-out capital and won’t have to dip into your savings or capital reserves.

You can ensure there is greater transparency for the insured person’s beneficiaries as they’ll have a clearer picture of what they will receive for selling the shares.

Why consider shareholder protection?

If a business owner dies with no share protection in place, their share in the business may be passed onto their family. This means that the surviving business owners could lose control of a proportion of the business, or in some circumstances, all of it. The family may choose to become involved in the ongoing running of the business or could even sell their share to a competitor. 

Don't leave it to chance.

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Tax Implications

Because each policy is qualifying or has no surrender value, there will be no income tax liability on the proceeds in the event of a death claim. Neither will there be CGT, because the proceeds are payable to the original beneficial owners the other business partners.

However, in the event of a valid critical illness or terminal illness cover claim, if you sell your shares the capital gains liability will be the difference between the amount you bought them for and he amount you sell them for. If you receive more from your shares than you paid for them you would have made a capital gain and may need to pay Capital Gains tax.

If all the business owners take part in the share protection there will be no Inheritance Tax (IHT) at the outset or when further premiums are paid. This is because it can be claimed that the arrangement is a bona fide business transaction for full consideration with no gratuitous intent (Inheritance Act 1984) (IHT 1984 S 10) full consideration being the fact that all the business owners are taking part. There will be no surrender IHT on the policy on death, since no transfer of value has happened.

There will be no IHT on the share protection on death, because 100% business property relief applies. 

DISCLAIMER: Broker Mortgages Ltd are not tax advisors, nor do we claim to be. We strongly advise and recommend that tax advice is sought from a taxation professional prior to setting up a policy.

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