What is Business Protection?
On death the shares of a deceased director form part of their estate.
Those who inherit the shares may not want to get involved in the business or conversely the surviving shareholders may not want the next of kin to come into the business.
The most feasible option is to sell shares back to the surviving shareholders. This would require the shareholders to produce a substantial lump sum.
The solution is business protection – an arrangement can be put in place whereby on the death of a shareholder, funds become available to buy shares back from the next of kin.
Categories of Business Protection
There are two types: partnership and company
How it works
With Business Protection, a company or partners enters into a legal agreement with each of its to buy back shares from their personal representatives in the event of death.
The company takes out a life assurance policy on each shareholder, to provide funds to enable the company to fulfil its obligation under the agreement.
In the event of death, the proceeds of the life assurance policy are payable to the company to be used to buy back shares from the deceased’s next of kin.
The major advantage of the “Corporate” arrangement is that the cost is borne totally by the company with no benefit-in-kind (BIK) implications for the individual shareholders.
This expense for the company is not tax deductible.
A legal agreement is put in place between company directors or partners, giving the company/partnership an option to buy the shares back from the deceased’s next of kin and the next of kin an option to sell the shares to the remaining shareholders or partners. If both parties mutually agree not to exercise the option, the deceased shareholders’ successors retain shareholding and come into the business.
The complexity of the business protection arrangement means it is a method of share protection insurance that should not be considered without the assistance of legal and taxation advisors. This is because it needs to comply with Company and Revenue Law.