Many of our clients are business owners themselves. Often we find that the protection arrangements between the directors who own the business are woefully short – if not non-existent.
One major area of concern is what could happen to the business if one of the directors should die.
If there is no correctly tailored life insurance arranged between them, then they could find the surviving directors lose their control of their business. Clearly this is not what each would want – never mind the emotional turmoil of enduring the death of their friend and business partner.
But from a business point of view it can only be sensible to put arrangements in place correctly to ensure the control of the day to day decisions of the company. The same is exactly true in the event of a director of the business were to be diagnosed with a Critical Illness.
Apart from having to deal with the difficulties and emotional problems this would ultimately bring, the business must be responsible to itself and correctly arranged insurance for this would act like a lifeboat during a very stormy period.
Other aspects of protecting the business is for long term incapacity of a ‘key person’ within the company. This doesn’t necessarily have to be a director or shareholder, this could be a member of the team who you rely on to bring in a significant share of the turnover/profits of the business and who you would need to ultimately replace to keep the business going smoothly.
To replace a key member of staff if they fell sick and couldn’t work could cost a great deal of money, particularly if a replacement were needed quickly to avoid any long term negative impact on the turnover and profits of the company itself.
For many of our clients who own their own limited companies there exists a very tax efficient way to set up life cover as a ‘death in service’ scheme so their loved ones are protected by a life assurance policy owned by their company.
This is an HMRC approved scheme which a number of insurance providers subscribe to, which enables the directors of the limited company to put in place a life assurance policy – owned by their company and the premiums paid for by their company.
In doing so HMRC have approved that there is no further ‘benefit in kind’ because the company is paying the premiums. Unlike other benefits which the company may pay for, Relevant life avoids the tax treatment of a more traditional benefit in kind where the tax man treats the policy premiums as an additional income.
For these individuals it enables the business to cover the cost of the premiums without causing any further tax liability, and the cost of the premiums to the business can be treated as a business expense.
Case study 1:
We were approached by three directors of a limited company, (recruitment business) in London SE1.
Assisted all three with their mortgage requirements and through further discussions they wanted to review their life cover arrangements.
They had made no existing provision.
Coreco recommended a Relevant Life Policy (individually) for all 3 directors and for varying amounts of cover.
The company is the ‘plan owner’ of each policy and all plans are written into trust from the outset.
The company pays the premiums for all three plans NOT the individual director.
The company pays the premium annually in this case (can be monthly if preferred).
The company benefits from the taxation advantages under HMRC’s legislation on Relevant Life, and does not fall into any ‘Benefits in Kind’ treatment.
Case Study 2:
Our clients, a husband and wife are owners of a Limited company (Architects).
Mr A does all the architectural work, whilst his wife looks after the books until accounts need auditing each year.
Mr A wanted to take out some life cover for his family in the event he should die.
Coreco discussed the advantages for him and his business using a Relevant Life Policy rather than a standard plan.
Premium was rated due to medical history but still went ahead as his company cover the premium costs anyway (not him personally).
Premiums are NOT paid by the client personally and in this case the company pays these annually. Again the plan is written into trust from the outset.
Like in case study 1 the taxation advantages for the company are worth having and again avoids the ‘Benefits in Kind’ trap.
In short, clients get their life cover, they don’t have to pay the premiums out of their own personal incomes, and the business benefits from the tax advantages approved by HMRC.