Three things to think about:
I drop dead, most of my assets are wrapped up in the company, how do my dependents carry on?
My Sales Director drops dead, how do I survive until I replace him?
My fellow shareholder drops dead and his wife wants me to buy her out at the last company valuation, how do I find 50% of £5Million?
Coping with “I drop dead”
If you work for a big company or in the public sector you will have Death in Service benefit, which pays out to your dependents if you die in harness. It is more unusual in small businesses and impossible to get Group terms with fewer than 5 eligible employees. Relevant Life cover gives you death in service benefits, with the premium payable as business expense, so you pay no personal tax for a “personal” benefit. It is not a universal panacea; as there are some restrictions over the business structure, cover types and total benefit.
Coping with “My Sales Director drops dead”
If a key employee dies, the business may not survive if you cannot replace them in a timely fashion. Keyman insurance provides cash to the company to meet the cost of recruiting and training a suitable replacement or cash to wind up the company in an orderly manner. The premium is a legitimate business expense, so is allowable for tax purposes.
Coping with “My fellow shareholder drops dead”
If your fellow shareholder dies, then either their spouse will want to be involved in the business or they will want you to buy them out at the market rate. If you do not buy them out, then you will be stuck with someone you did not choose, or their personal representative. Who needs an incompetent business associate? Shareholder protection and a good shareholders agreement will allow the survivors to give a good price for the deceased shareholders stock and retain full control of the business. The premium is a legitimate business expense, so is allowable for tax purposes.
I have some horror stories about business protection gone wrong, which have the common theme of not planning for the worst;
- A small family company where the patriarch died and the family thought it was all under control. After the funeral, the bank rang and asked that the company overdraft be repaid as the deceased had given a number of undertakings to the bank and they were not willing to take alternative security with other members of the family.
- An engineering firm with two shareholder directors, where the director with the estranged wife died. The wife then insisted on her new partner being made the sales director, not withstanding that the new partner was a failed estate agent not an engineer. The business became deadlocked, then insolvent within two years.
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The information contained is for guidance only and does not constitute financial advice. It is based on our understanding of UK legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change. Accordingly no responsibility can be assumed by Martin-Redman Partners its officers or employees, for any loss in connection with the content hereof and any such action or inaction.