In establishing any business attention often, and rightly, turns towards the externalities. The identification and research of your target market and competitors, developing a marketing strategy, deciding upon the appropriate legal business structure to use, the sourcing of employees and drawing up a business plan to name a few. Yet, in the midst of this flurry of activity it is all too easy to overlook performing due diligence on the very asset that keeps all of the above in check, you. This is where the need for a life assurance business arrangement comes into play. This insight will focus on the most common arrangement, Corporate Co-Director Insurance, which is also referred to as shareholder protection. The cover type is applicable to private limited companies only where ownership is based on a divided shareholding.
Why is Corporate Co-Director Insurance needed?
As Directors are the key decision makers for a firm who more often than not are the majority shareholders of the business and bring unique skills sets to their roles, the premature death or serious illness of a shareholding director can have a severe impact on the remaining shareholders and the deceased’s family. Having Corporate Co-Directors Insurance in place allows the surviving shareholders to buy back the true value of the shares of the seriously ill or deceased director from their next of kin so that it may continue as a going concern.
What are the Benefits of having Corporate Co-Director Insurance?
- The company pays the premiums of the life assurance policy on behalf of each director.
- The next of kin or successor of a deceased director is monetarily compensated for the deceased’s shares.
- The Surviving director(s) maintain full control of the business as all shares are consolidated upon purchase.
How does a Corporate Co-Director Insurance policy work?
To affect a Corporate Co-Director Insurance policy each Director is noted as the life assured and the company is the policy owner, with monthly premiums paid by the company. The company must enter into a legal agreement called a ‘Buy/sell agreement’ or ‘double option’ where each Director has the option to buy the others shares in the business upon death or for the deceased director’s successor to have the option to sell those shares if they so choose to.
The tax implications of having Corporate Co-Director Insurance
As shares are acquired at the date of death, no CGT liability applies to the Deceased director’s shareholding upon their death. If, however, the remaining director were to sell those shares at a future date for a value above the acquisition value on death, any gain would be liable for CGT. The liability of CAT does not apply where the spouse of the deceased inherits the shares.
As the establishment of Corporate Co-Director insurance involves share purchasing, it is recommended that the companies tax adviser reviews such an agreement in order to ensure any future amendment to the Insurance policy complies with Revenue laws.
Unlike the payment of a premium for general insurance such as a fire or motor policy which can be an allowable deduction by a business against its profits, the premium payable for Corporate Co-Director Insurance (or even Keyman Insurance – see our separate blogs) should not be claimed as an allowable deduction. This is because the policy proceeds would then become subject to Corporation Tax. By not claiming a tax relief on the premium, the proceeds themselves remain untaxable.
At Aspire Wealth Management we have decades of experience in advising Directors on how best to structure Co-Director Insurance to suit their individual firm’s needs. Contact us today to find out how we can help insure you so that you can ensure your clients continue to receive excellent service whether you are with them or not.
Find Out How We Can Help You
Improve your financial future by arranging a call back or online meeting.
Simply book yourself into an appointment at one of our available times.