When running a business, there are multiple pressing issues competing for you attention at any given time, to ensure the smooth day to day running of the business.
Unfortunately, however, the unexpected can occur which throws your business plans off track and it is, therefore, imperative that time is taken to consider where your business may be vulnerable prior to an event occurring. This will help to mitigate any negative outfall, manage the risk and allow you to have plans in place to get through it.
Key person cover
Life insurance is something that we should all have, but did you know that you are able to take out life cover for your business? Have you considered a scenario where one of your essential employees were to unexpectedly pass away and how the business would cope?
Key person insurance works as follows:
- The business pays a regular premium to the insurer. This is an allowable expense providing the policy is ‘wholly and exclusively’ for the purposes of trade and not for the benefit of the other shareholders.
- If the insured person were to pass away within the plan term, the business will receive a payout.
- Critical illness cover is also an option that you can add to the policy.
- The payout is notionally taxable in the hands of the business, although if the money is used for the purposes of trade, the expenses are tax-deductible.
- The money can be used to recruit another key staff member or to allow the company to buy back shares from the deceased person’s estate.
Cross option agreement
Alongside a key person insurance policy, and if the key person covered is a shareholder, you are able to use a cross option agreement which effectively allows the business or other shareholders the option of purchasing shares from the deceased shareholders estate.
This is an effective way of protecting the business interests of the company, as well as being able to provide the deceased person’s family with a lump sum to help with the transition and to reduce disruption to the family, rather than becoming a part owner of a business.
It is important to note that a cross option agreement is not binding and is still very much an ‘option’ with both parties having to agree to selling and buying the shares if the situation arose.
Providing the shares are not subject to a sale agreement at the time of death, the deceased person can qualify for Business Relief, protecting their shares from Inheritance Tax. A binding agreement could invalidate this relief.
Life cover for employees
Group life insurance is a traditional way of setting up life insurance for a business’s employees and provide a range of benefits for both the employees and their families, as well as the business itself. Like an individual life insurance plan, this cover will provide a lump sum to the deceased person’s estate or beneficiaries if they were to pass away during the policy term.
This method can be particularly beneficial for larger companies, as costs are calculated on a per-employee basis and underwriting is often simplified. This can, therefore, be an attractive perk for staff members, especially those who may struggle to get life insurance in place if they have medical conditions, and it also comes with the added benefit of the premiums being tax-deductible for the company, making it even more cost-effective.
A relevant life plan offers higher levels of cover (usually a multiple of salary), however, it does involve increased underwriting. There are also certain conditions that must be met in order for the plan premiums to qualify as an allowable business and for the benefits to be paid tax free.
You can also arrange income protection insurance for your employees. This will pay a regular income if they are unable to work due to illness or disability and again come with the benefits of reduced underwriting, competitive costs and the premiums being an allowable business expense. Income protection benefits are capped dependent on your salary and it is always important to check with the insurer if other earnings such as dividends are included when calculating maximum cover.
The taxation of the benefits depends on who the benefits are paid to in the first instance. If the benefits are paid to the business first, then the money must then be paid to the employee with National Insurance and tax deducted as if it were a salary. However, benefit that are paid directly to an employee will not be taxed but there tends to be a lower maximum cover available.
It is also possible to arrange policies that will also provide a payout to the business to aid with the cost of recruitment and training of a replacement etc.
Directors can also benefit from income protection, either as part of a group scheme or a standalone policy. This can compensate for reduced earnings, or allow your share of the profits to be re-invested in the business while you are unable to work.
Private medical insurance
Another benefit available to businesses is private medical insurance. This can be valuable for both directors and employees and offers the following advantages:
- It reduces waiting times for medical procedures.
- Most plans offer additional support to improve the health and wellbeing of employees.
- Costs are competitive compared with personal policies.
- Private medical insurance is a desirable perk when recruiting employees.
Power of attorney
A business power of attorney allows you to appoint someone to make important decisions regarding your business if you were to lose capacity by becoming unwell or seriously injured.
This helps the business continue to operate in your absence as it, not only gives them authority to act in line with your wishes but, crucially, provides access to business bank accounts and other important services.
This can provide both yourself as a business owner as well as your employees peace of mind if something serious were to happen to you, that the business can continue to operate smoothly.
If you were to pass away, the default option would be for your shares to pass into your estate under the terms of your will. This could suit you if you intend to pass on a family business, or if the other shareholders are prepared to buy the shares from your estate.
However, this is subject to the terms of the company’s articles and memorandum, which may impose restrictions on the transfer of shares.
A business will allows you to direct your representatives not only regarding what happens to your shares, but also how the business should be run after your death, for example, who should take on key responsibilities.
Running a business is never risk-free, but thinking ahead, planning and mitigating the risk can help to protect your business if the worst should happen.
Please do not hesitate to contact a member of the team to find out more about business protection.