Protection for your corporate clients. For financial advisers only

Transcription

1 Protection for your corporate clients For financial advisers only

2 contents introduction 4 Key PERSON cover 5 Who needs it, and why? 5 Who does it cover? 5 Who is a key person? 6 Calculating the cover 7 Which method should you use? 7 Apportionment method 8 Salary method 8 Loss of profits method 8 Payroll method 8 Applying for key person life cover through Protect 9 Who completes which part of the application form? 9 Policies within a plan 9 Loan cover 10 Why might a business need loan cover? 10 Who is covered? 10 How to set up loan cover with Old Mutual Wealth 11 How to apply for loan cover 11 Retaining the business 11 Assigning a policy to a key person 11 Key person or loan cover for partnerships 12 The different sorts of partnerships 12 We regularly update our literature; you can confirm that this March 2018 version is the latest by checking the literature library on our website 2

3 Partnership and shareholder protection 13 Who needs it? 13 Why? 13 What cover is needed? 13 Who does it cover? 13 Setting up the agreement 14 Double option agreement 14 Single option agreement 14 Automatic accrual agreements 15 Company share purchase 15 Ways to set up the insurance 16 Life of another arrangement 16 How to apply for life of another cover 16 Writing the plan in trust 17 Pre-owned asset tax 17 Trusts and inheritance tax 17 How to apply for partnership or shareholder cover written in trust 18 Equalising premiums 18 Assigning the policy 18 Taxation 20 Key person or loan cover 20 Partnership or shareholder protection 21 Sample letters to HM Revenue & Customs 22 The Old Mutual Wealth products 24 Protect 24 Immediate cover with Protect 25 How can we help you? 28 Contact us 28 Our website 28 The literature you might need 28 Further information 29 3

4 introduction Insurance cover can be important to a business s survival. Yet too many businesses forget to insure their most valuable asset their people. this could be an employee, director or partner. Why business assurance is needed At Old Mutual Wealth we have been providing business protection for many years and have built a reputation for our technical knowledge and support. This guide gives both practical and technical information about ensuring that your business clients are fully protected. Although we all confidently expect to live for years after we retire, the reality is that many of us do not. Statistically, if a business has five key people or shareholders in their early 40s, there is a 21% chance that one of them will die before they are 65. There is also a 47% chance one of them will become critically ill before they are 65. This table shows the likelihood of an essential team member dying before they retire at age 65. Definitions For simplicity, we have used these terms throughout this guide: Key person Any key person for whom the business needs insurance cover, including directors. Business A business of any type, including partnerships, limited liability partnerships (LLPs), limited companies and sole traders. Age Number of partners % 14% 19% 23% 40% 40 9% 14% 18% 22% 39% 45 9% 13% 17% 21% 37% 55 7% 10% 13% 16% 29% Based on TMC00 ultimate mortality. This table show the likelihood of an essential team member becoming critically ill before age 65. Age Number of partners/directors % 34% 42% 50% 75% 40 23% 33% 41% 49% 74% 45 22% 32% 40% 47% 72% 55 17% 25% 31% 38% 61% Types of cover This guide covers the following types of protection a business might consider: Key person cover Loan cover Partnership/shareholder protection 4

5 Key person cover Any business could suffer if a director or key person died or became ill. As well as the day-to-day problems, the absence of a key person can have a serious effect on the finances of the business. Who needs it, and why? Many businesses should have this cover to protect against loss of earnings or profits, and against the costs of replacing a key person. Sole traders are as vulnerable as larger businesses, as illness or death might cause their business to close. This could give rise to large debts including redundancy payments, for which their family would be responsible. In addition, if the business closes, protection for the loss of income for the family should be considered. This section explains how to identify a key person and how to calculate the cover needed. Before setting up key person cover, a company should record its intentions in the minutes of a board meeting. A partnership should do the same in a Partner s Resolution. Who does it cover? the business takes out a protection plan on the life of the key person. the business is the policyholder and pay the premiums. the key people are the lives assured. the business receives the proceeds of any claim. The plan is set up on the most suitable basis for the business s particular needs. This may be a fixed or rolling term basis. In some cases, say for an owner of the business, a whole life policy might be used. For those who want the benefit of guaranteed insurability and cover that has premiums fixed for ten years at a time, Protect offers a rolling term as a useful alternative to term assurance with a fixed end date and whole life. You can find out more about rolling term in the Protect adviser guide About Protect. See Taxation on page 20 for more information on the tax treatment of different types of plan. Policyholder Life assured How does the cover work? The business* The key person The business takes out cover on the life of the key person. It can assign the insurance to a bank to guarantee a loan or overdraft if necessary. * For information about how cover should be set up for partnerships, see page 12. 5

6 Key person cover (Continued) Who is a key person? Deciding who is a key person to a business can be subjective, and varies widely between businesses. The main point to consider is whether the business s turnover and profitability would be affected if that person were absent because of serious illness or death. In addition to directors, a key person could include a top salesperson, a skilled technician or the leader of an essential project. Here are some actual examples of cover that we have provided for key people: Key person s role Type of business Sum assured Football club manager Football 250,000 Managing director Events organisation 1.5 million Managing director Agricultural feed supplier 436,000 Director Catering supplies 1 million 6

7 Calculating the cover Working out the sum assured needed for each key person is not an exact science. When you are working out how much cover to have, you should consider: the potential loss of profits the potential loss of business contacts and goodwill a reduction in turnover the possible loss of confidence in the business by its bank or other investors, who could then withdraw their financial support or recall loans a possible problem with the business s suppliers, who might withdraw credit or tighten their terms of trading the knowledge and expertise which will no longer be available to the business, even for the time while the key person is ill the effect on potential investment, such as a management buy-out, expansion plans and industrial relations the cost of recruiting and training a replacement, and the time it may take to do this different levels of life cover and critical illness cover, if the death or critical illness of the key person would affect the business differently. You need to assess how long it would take the business to recover, and the costs that the business would have to bear during such a recovery. Which method should you use? There are several different methods to use when calculating cover and we have shown these on page 8. However, where the sum assured is linked to a loan, the cover for each person is usually equal to the amount borrowed (see Loan cover on page 10). 7

8 Calculating the cover (Continued) 1. Apportionment method This uses an average of the last three years pre-tax profits, less any exceptional or extraordinary items. Normally, someone inside the business will be able to allocate the profits between the key personnel, based on their individual contribution to the business. The advantage of this method is that it can be simple, and related to the business s profits. However, the disadvantage is that it uses a subjective assessment of the key person s contribution to profits. 2. Salary method This method uses a straight multiple of the key person s full salary package, including their pension, company car and any other benefits in kind. This method can be simple to work out and understand but does not take loss of profits into account. Example 3. Loss of profits method This method uses a straight multiple of the business s profits. This can be based on either the net or gross profits. It is simple, but does not take fixed costs into account. 4. Payroll method The total salary package is divided by the business s total payroll, multiplied by the yearly gross profit and the number of years the business believes it will take to recover from the loss of the key person. It can reflect the true situation more accurately, but the key person s total salary package must be shown to be reasonable within the marketplace. Often we don t need any further financial information than that on the application form. However, for sums assured above certain limits we will need more information before we can underwrite the case. Example Total salary package 50,000 a year Total salary package 50,000 a year Chosen multiple the normal multiples are: up to 10 for life cover up to 5 for critical illness cover Total payroll Gross profit 2 million a year 10 million a year So the cover needed is 50,000 x 10 = 500,000 (or 50,000 x 5 = 250,000) Number of years to replace key person 3 years So the cover needed is 50,000 x 3 x 10,000,000 = 750,000 2,000,000 8

9 Applying for key person life cover through Protect Both the business and the key person need to complete parts of the application. These tables show who has to complete which parts. The business (the company director or an authorised signatory) completes: Each key person completes: Both the business and the key person complete: Policy and policyholder sections the direct debit instruction Health information the declaration and application If a company director is to be the key person, they may prefer to have a different signatory on behalf of the business to show that it was the company s decision to have the cover, not a personal one. If a sole trader wishes to have key person cover on their own life, it should be written as an own life policy in trust for their family. Policies within a plan for ease of administration, you can write all of a business s Protect key person policies in a single plan and complete just one direct debit instruction. if a key person does not wish to share their medical information, they can complete separate application forms and send them to us in a sealed envelope addressed to the Chief Medical Officer at our Head Office. We will still treat them all as policies within one plan, as long as each form is sent with a note stating that it is to be one of the policies within a specified plan. 9

10 loan cover A lender often makes it a condition of the loan that some of the directors and key people have insurance cover. In fact, the lender may not advance the money until the cover is in place. Why might a business need loan cover? As well as loans from recognised lenders, a business may have a loan from one or more of its directors. This might be an actual unsecured loan, or the directors may leave some or all of their salary, bonus or dividends with the business in the form of a loan. In addition, directors often act as guarantors of loans to the business from lenders, and may be jointly liable, or severally liable, or jointly and severally liable for the repayment of the loan. It is important to understand each individual s liability under the terms of the loan before arranging cover. This information should be available in the original loan agreement. Who is covered? The business is usually the policyholder, and the key person is the life assured. If the life assured dies or has one of the named critical illnesses, the business receives a cash sum to pay off the outstanding loan. Policyholder The business Life assured Any person directly or indirectly responsible for the repayment of the loan (the key person). How does the cover work? The business takes out cover on the life of one or more key people. The business can assign the insurance, for example, to a bank to guarantee a loan or overdraft if necessary. Unless the lender specifies the type of cover and term, the business can choose the best combination to meet its particular needs. Cover can be for life only or combined critical illness and life cover. The policy should run for the duration of the loan. For partnerships, please see page

11 How to set up loan cover with Old Mutual Wealth When setting up loan cover, you will need to consider: Should the policy include life or critical illness cover, or a combination? How much cover is needed now? Will this increase in the future? How will the loan be repaid, and over what period? Have any directors or partners given personal guarantees for the loan? Whose death might affect repayment of the loan? Does your client need an immediate cover facility to avoid delays in receiving the advance? See page 25 for more details. How to apply for loan cover Setting up the cover for a loan follows the same process as setting up key person cover. See page 9 for full details. Simplified acceptance We have reduced the documents we need for many business loans to the minimum. Provided that the cover meets the criteria below, all we need with the application is evidence from the lender that the applicant has taken out a business loan. the sum assured is no higher than 2.5 million. the amount of cover must be the same as or less than the loan amount. the loan is from an approved UK lender. You can find full details of this facility in our leaflet Old Mutual Wealth for quick and easy loan protection cover. Retaining the business When your clients apply for a business loan, the lender may offer them insurance cover as part of the loan arrangement. For example, the lender may point out that it can offer immediate cover so the loan will not be delayed. The potential disadvantage of this is that your client may not get the most suitable product, as some lenders do not consider the full range of plans available when recommending protection cover. We offer an immediate cover facility with Protect, which can help you keep this business. This offers your clients flexible cover, tailored to meet their needs and no delays in completing their loan. And if they need to increase their loan in the future, it is simple to increase their cover later, too. See page 25 for more details. Our cover is flexible enough to adapt to your client s changing needs in the future. For example, most of the Old Mutual Wealth protection policies include a guaranteed insurability option for extra cover if a business s loan increases. If the business reduces the loan, you can also reduce the cover accordingly. Assigning a policy to a key person When a key person leaves the business or retires, it is possible to assign the policy to them, so the cover can continue for their personal benefit. This is done using a Deed of Assignment. 11

12 Key person or loan cover for partnerships The different sorts of partnerships A partnership may have any number of partners, and is defined as the relationship that exists between people carrying on business in common with a view of profit. The difference between unlimited and limited liability is shown below. Usually an existing partnership has unlimited liability, except in Scotland. However, the Limited Liability Partnerships Act 2000 allows new partnerships to be able to choose to have some form of limited liability if the partners prefer. Partnership Act 1890 Before 2000, the rules governing partnerships were: All partners have joint and several liability. They may be forced to use their personal assets to settle a liability incurred by a fellow partner. under certain conditions, some partners could have limited liability, but at least one partner in any partnership must have unlimited liability. Unless otherwise written into the partnership agreement: the partnership is dissolved on the death of any of the partners each partner is entitled to his or her share of the partnership and profits on retirement. in England, Wales and Northern Ireland, a partnership is not a legal entity and cannot enter into a contract, for example for insurance cover. in Scotland, partnerships are legal entities in their own right. For this sort of partnership, each partner has an own life plan, written in trust for the benefit of the other partners, as described on page 17. The partners should consult their legal adviser to put in place an agreement that any benefits paid on claim will be used for the partnership. No tax relief is available on the premiums paid for key person cover, as the life assured is a partner rather than an employee see Taxation on page 20. Limited Liability Partnerships Act 2000 This is a half-way house between the old partnership status and limited company status. Its features are: it is a separate legal entity which is able to enter into contracts and hold property. it operates under different taxation rules from partnerships with unlimited liability. It must publish its accounts. It is supervised by a regulatory body. Old-style partnerships without limited liability are still available. This sort of partnership can take out cover as the policyholder. Each individual partner is then a separate life assured under a policy within the plan. 12

13 Partnership and shareholder protection The protection needs of partners and shareholders are broadly similar to enable them to buy out the share of a business colleague who has died or become too ill to carry on working. Who needs it? This protection is for: the partners in a business partnership of any size the shareholders of a private limited company. For the sake of simplicity we will call partners and shareholders the business owners. Why? On the death or illness of a business owner it is important that those who remain keep control of the business. Partnership or shareholder protection can help by enabling the business owners to continue trading. It also avoids the added financial problems of raising capital to buy out a business owner who is critically ill, or the heirs of a business owner who has died. Problems can arise when someone without experience or any interest in running the business inherits a share. The remaining business owners may need to buy that share to keep control of the business. Losing a key member of the business can lead to problems with lenders and suppliers when the business is already suffering the loss of an important team member. Having the right insurance means the remaining business owners can choose to buy out the interest of a critically ill business owner. This also ensures that the business owner s family receives the full value of their interest in the business on death. If a company s Articles of Association include a pre-emption clause, the remaining shareholders have first refusal to buy the shares of a shareholder who dies or leaves due to illness. If a partnership (other than an LLP) has not drawn up a partnership agreement, under current law the partnership will end on the death of any of the partners. What cover is needed? The amount of cover will reflect the value of each owner s share in the business. This is a proportion of: the capital value of the business, plus the goodwill included in the accounts, plus any undistributed profits, plus the individual s loan or partnership account. The value of the business should normally be assessed professionally, and our underwriters may ask to see a copy of the valuation. The value of each share should be reviewed regularly to ensure that the cover remains adequate. Who does it cover? Each individual business owner takes out a separate plan, either on a life of another basis or written under a business assurance trust. See page 18 to find out more about how policies can be written in trust. The policy can have a fixed or rolling term, depending on the business owner s specific needs. This example shows how four partners could use Protect to insure their shares in the business: Policy 1 John Poole 300,000 Each partner chooses life cover with a rolling term and writes the policy under trust for the other partners. Policy 2 David Adams 250,000 Policy 3 Susie Harris 250,000 Policy 4 Jim Taylor 200,000 13

14 Partnership and shareholder protection (Continued) Setting up the agreement Whichever way your clients choose to set up the plans, they will need some form of agreement to identify how they will use the funds after a claim. This agreement must be consistent with a company s Articles of Association, or in the case of a partnership with their Partnership Agreement. You can get illustrative option agreements from our website: co.uk/adviser/products/ protection/business-protection/ A buy and sell agreement is a binding contract for the shareholder or partner s family to sell their share, and for the remaining partners or shareholders to buy it. If such an agreement is used, business property relief (BPR) will be lost, as HM Revenue & Customs (HMRC) will consider it to be a contract for sale. A single or double option agreement should be used instead to retain BPR. These provide the option to buy and/or sell but are not binding i.e. they require one party to trigger the option. 1. Double option agreement The surviving business owners have the option to buy the share of their ill or deceased colleague within six months of the event. The agreement requires the person insured (or their beneficiaries or their legal personal representatives) to sell their share of the business to the other business owners if asked to do so. Similarly, the agreement requires the other business owners to buy out the shares of the person insured if asked to do so by them (or their beneficiaries or legal personal representatives). The remaining business owners use the proceeds of the insurance policy to buy the share. It is not a binding contract for sale so there is no danger of losing inheritance tax (IHT) business property relief, where it applies. (Some types of trade are not eligible for IHT business property relief.) If new owners join the business and need this protection, the owners must complete a new cross option agreement once the new protection policy is in place. 2. Single option agreement A single option agreement covers critical illness and permanent disability claims. Under this agreement, the critically ill or disabled partner or shareholder can ask the remaining business owners to buy the share if they wish, but the remaining owners cannot insist on the sale. This option can be combined with a double option agreement covering the life insurance on the partner or shareholder. This means you do not need to use a separate form unless you only want the single option agreement. Like the double option agreement it is not a binding contract for sale, so there is no danger of losing IHT business property relief. It is essential that legal advice is sought before the business partners or shareholders enter into a cross option agreement. 14

15 3. Automatic accrual agreements Some partnership agreements include a clause that each partner s share will automatically pass to the other partners on death. This applies particularly in specialist vocation partnerships such as solicitors or dentists, where an interest in the business can only belong to a suitably qualified individual. Therefore, leaving it to a member of the family may not be possible. To make sure the deceased partner s family receives payment for the share, each partner has a policy written in trust for their own family to cover the value of their share of the partnership. Under an automatic accrual agreement, for inheritance tax purposes the estate of the deceased business owner is considered to receive the value of the share in cash rather than shares. This can lead to a tax liability. The partners should consult their legal adviser to have an automatic accrual agreement drawn up. The agreement requires each partner to maintain the insurance to cover the full value of their share of the partnership. If the partner leaves the partnership, the plan can continue for their family s benefit. 4. Company share purchase This is a complex area, and clients should seek professional advice on it. Share purchase must be allowed for in a company s Articles of Association. If the shares are quoted on a stock exchange or the alternative investments market, the purchase must be approved by the shareholders. The company can use life or critical illness insurance to provide funds to buy the shares. The policy normally lasts until the expected retirement date of the life assured, and no trust is needed as the company receives the benefits on claim. Due to the complexity of such an arrangement we have not provided further details on it within the next section. 15

16 Ways to set up the insurance There are two ways you might set up the plans for partnership or shareholder protection. 1. Life of another arrangement This is a simple arrangement, which is suitable for a few policyholders. Each business owner has a policy on their own life, taken out by the other owners. They do this by applying for insurance on each of the other owners, with the insurable interest being the interest in the business (see diagram below). It is appropriate when there are no more than three partners or shareholders. How to apply for life of another cover For two owners: each person takes out cover on the life of the other the policies are not written in trust a cross-option agreement should be put in place. For three owners: each policy has two policyholders, with the third owner as the life assured the policies are not written in trust a cross-option agreement should be put in place. Policy A Life assured = Partner A Partner A is a policyholder of Policy B and Policy C Policy B Life assured = Partner B Partner B is a policyholder of Policy A and Policy C Policy C Life assured = Partner C Partner C is a policyholder of Policy A and Policy B 16

17 2. Writing the plan in trust Each business owner takes out a policy on their own life and, at the same time, writes it under trust for the benefit of the other business owners. Old Mutual Wealth offers both a business assurance trust under which the settlor is excluded from benefitting and one in which they are included. Both are discretionary trusts so the trustees have the power to alter the beneficiaries should the business change in the future. Where the settlor is excluded as a potential beneficiary of the trust, there is no potential for pre-owned asset tax (POAT), but the policy cannot be assigned back to the settlor at a later date. Where the settlor is included as a potential beneficiary of the trust, there could be potential income tax charges under POAT (see following section), but the policy can be assigned back to the settlor should they leave the business. The trust should always exclude the settlor s family members from the beneficiaries, unless they are also partners or shareholders in the business. We also offer an absolute trust where named beneficiaries and their shares are specified at outset. These trusts can t be changed to reflect updates to the business ownership but are useful for businesses where the ownership is likely to remain unchanged. The life assured is usually appointed as a trustee, and should have at least another trustee to ensure prompt payment of the proceeds. Written agreements set out all the parties rights when they make a claim on the policy. If any of the business owners other than those with a very small shareholding do not take out a policy, you should seek legal advice. You can find copies of our trust forms on Adviser/resource-library/ Literature-Library/ Pre-owned asset tax Pre-owned asset tax creates a potential yearly liability to income tax. This only applies if the settlor is included as a potential beneficiary of the trust and the tax is assessed yearly on the potential benefit, even if nothing is received. The potential is far lower for term assurance plans with no surrender value. The tax due is assessed using an official rate of interest on the market value of the potential benefit. This may increase if the settlor is in poor health. If the tax due is less than 5,000, no tax will be payable. Trusts and inheritance tax Discretionary trusts are potentially liable to inheritance tax charges on entry, every ten years, and on exit. Partnership or shareholder cover will not be subject to an entry charge because it is generally a commercial arrangement and so no gift has been made. You and your clients must select the most appropriate trust for their needs: Discretionary business trust has flexibility to cope with changes in partners or shareholders, and in their relative shareholdings potential periodic and exit charges. Absolute trust no flexibility to allow for future changes in the business no potential for IHT charges. 17

18 Ways to set up the insurance (Continued) How to apply for partnership or shareholder cover written in trust Each business owner should normally: complete a separate application (all sections) and a separate direct debit instruction complete a separate business assurance trust complete a separate deed of appointment of more trustees (with the other partners or shareholders). Although we do not need to have these on record, to complete the arrangement the business owners should: get a professional valuation of the business complete a cross option agreement equalise the costs. Equalising premiums Most businesses will include owners of different ages and states of health, who need different levels of cover. So some owners will pay more for their cover, but will potentially receive less benefit from the arrangement, as they are likely to make the first claim. If the premiums are not equalised between the owners, HMRC will not view it as a commercial arrangement and there may be an IHT liability. This is because without equalisation HMRC may consider the policies to be gifts (transfers of value), and this could lead to tax liability as the gifts favour the younger business owners or those with a smaller stake in the business. Possible ways to ensure this does not happen are: do nothing if the differences between the premiums paid are small increase the business owner s drawings to compensate for the inequality. However, there may be tax and National Insurance implications in doing this equalise the premiums paid by the partners or shareholders. The principles are the same for both partnerships and limited companies. You can find an example on the opposite page. Assigning the policy Because it can be difficult to obtain insurance near retirement age, the settlor may wish to have a policy which can last throughout their life. When they retire or leave the business, the trustees can assign it back to them to continue for their personal use. If they have not already been doing so, they will take over payment of the premiums. This can only be done if the settlor is included in the trust, which may leave them liable to pre-owned asset tax. However, the benefits of having cover after they retire might outweigh this disadvantage for them. Such an assignment of shareholder or partnership cover written on an own life basis under trust does not give rise to a chargeable event, and no tax will be payable. 18

19 Example Lunar Landscapes has three partners, and its current value is 200,000. Jim started the business and holds a 60% share. Abby and Neil joined him, and each has a 20% share. Jim s share Abby s share if Jim dies: neil and Abby will each be able to buy half of his share (30% each) of the business. So each is entitled to: Jim 75% of 40,000 if Abby dies, plus 75% of 40,000 if Neil dies. Abby 50% of 120,000 if Jim dies, plus 25% of 40,000 if Neil dies. Neil 50% of 120,000 if Jim dies, plus 25% of 40,000 if Abby dies. Jim is now 54, Abby is 28 and Neil is 42. They choose Protect with a rolling term so their cover can last as long as they wish. Their premiums are: Jim 1,995 a year Abby 122 a year Neil 281 a year Neil s share If Abby dies: Jim can buy 60/80ths (3/4) of her share neil can buy 20/80ths (1/4) of it. if Neil dies: Jim can buy 60/80ths (3/4) of his share Abby can buy 20/80ths (1/4) of his share. Total cost of cover: 2,398 To equalise the premiums: Jim pays Abby pays Neil pays Total Jim s premiums Abby s premiums Neil s premiums Abby and Neil pay 50% each Jim pays 75% and Neil pays 25% Jim pays 75% and Abby pays 25% , Total , , ,

20 taxation Key person The taxation of premiums for a key person arrangement is very much influenced by the conditions of the Anderson Rules. These rules are taken from a statement made in 1944 by the then Chancellor of the Exchequer, Sir John Anderson, in which he said the following: Treatment for taxation purposes would depend upon the facts of the particular case and it rests with the assessing authorities and the Commissioners on appeal if necessary to determine the liability by reference to these facts. I am, however, advised that the general practice in dealing with insurances by employers on the lives of employees is to treat the premiums as admissible deductions, and any sums received under a plan as trading receipts if (i) the sole relationship is that of employer and employee; (ii) the insurance is intended to meet loss of profit resulting from the loss of services of the employee; and (iii) it is an annual or short term insurance. If the insured person has a significant shareholding in the company (general rule is 5% or more) then tax relief is not normally given as the benefit usually provides two purposes, loss of profits and personal benefit i.e. share value increases. The policy should be a term insurance and shouldn t be longer than the usefulness of the key person. Loan Cover As the aim of loan cover is to provide capital on the death or illness of a key person to cover a liability this can never meet the rules covered above i.e. the sum assured isn t to meet loss of services/profits suffered as a result of the loss of the key person. For this reason, premiums are unlikely to be deductible as a business expense. The payment of the sum assured is likely to be seen as a capital receipt and therefore not liable to corporation tax. We have provided a flowchart below to help bring the above to life on the assumption the policy term selected is appropriate Is the relationship employer/employee? YES Is cover for loss of profits? NO Premiums are unlikely to be deductible as a business expense. Sum assured is likely to be seen as a capital receipt. YES NO NO Does the employee hold 5% + shareholding? YES Premiums are likely to be deductible as a business expense. Benefit is likely to be seen as trading receipt. Premiums are unlikely to be deductible as a business expense. Benefit is likely to be seen as trading receipt. 20

21 Partnership or shareholder protection Payment of the sum assured generally doesn t create a tax liability provided the plans are written in trust for the other partners or shareholders and suitable cost sharing arrangement have been made. There should be no IHT implications and the sum assured is normally paid free from income and capital gains tax as well. There is no tax liability on the proceeds of the plan for the business as the proceeds do not belong to it (they are paid to the trustees). Only family members who are partners or shareholders should be included as possible beneficiaries of the trust to ensure it is seen as a business (commercial) arrangement. Depending on who is going to pay the premiums on the policy there are different tax implications. For shareholders in a company, the premiums could be paid by: The company the company but is recouped from the shareholders The shareholders If the company pays the premiums, then they are considered to be a P11d benefit/benefit in kind. If the payments meet the wholly and exclusively for the purpose of business test* the company should receive tax relief on them. In the other two scenarios the company is not suffering the costs of the premiums and therefore there is no tax relief available. In all instances the shareholders suffer tax and National Insurance as they are either taxed as a benefit in kind or paid for out of net earnings. For partnerships and LLPs the treatment of premiums is the same regardless of how they are paid i.e. from a company account or personal account. Either way they are never deductible as a business expense. * this tests that the shareholders total remuneration, including the premiums paid on the policy, are not excessive in relation to the duties they perform for the company 21

22 Sample letters to HM Revenue & Customs For key person cover for a five-year term, only to replace lost profits Dear Sir or Madam Ref: [insert name of business and tax reference] The business above has taken out Protect, a life insurance policy, on the life of a key person [insert x s name]. Reason for the insurance [x] is a key person for the business. He/She holds the position of [insert role] and does not own any shares in [insert business name]. If [x] were to die [, or become disabled and unable to work,] the business would suffer financially. As a result, the business has insured the loss of profit resulting from the loss of [x] s services to the business. Insurance details Protect will pay out if [x] dies [, or becomes totally and permanently disabled]. The term of the policy is [five] years. It has no surrender value. The sum assured is aaa,aaa. The premiums are bbb.bb, payable [monthly/yearly] during the term. Please confirm the premiums are allowable expenses for corporation tax and therefore tax deductible. Yours faithfully On behalf of [insert business name] 22

23 For all other cases, such as terms of ten years or more or for loan protection Dear Sir or Madam Ref: [insert name of business and tax reference] The business above has taken out Protect, a life insurance policy, on the life of a key person, [insert x s name]. Reason for the insurance [x] is a key person for the company and holds the position of [insert role]. If [x] were to die [, or become disabled and unable to work,] the business would suffer financially. As a result, the business has taken out this insurance so that the sum assured can be used to: provide a cash sum to repay the business loan of aaa,aaa insure the loss of profit resulting from the loss of [x] s services to the business provide funds for the recruitment and training of a successor for [x]. Insurance details Protect will pay out if [x] dies [, or becomes totally and permanently disabled,] during the term. It has no surrender value. The sum assured is aaa,aaa. The premiums are bbb.bb, payable [monthly/yearly] during the term of [y] years. Please confirm the premiums are not allowable expenses for corporation tax and therefore not tax deductible. Yours faithfully On behalf of [insert business name] The sample letters above give guidance on the issues that HMRC will require information on in order to determine eligibility for tax relief. We can give no guarantees as to their effectiveness. 23

24 Protect This flexible term assurance plan includes a choice of: Type of cover Life cover Critical illness Options at an extra cost Total permanent disability benefit Premium protection benefit Cover reinstatement option TERM Fixed Rolling Whole life In addition, Protect offers: policies in a plan, to cover as many key people, partners or shareholders as your client needs different sums assured and optional benefits for each policy flexibility to add or remove policies option to increase the cover without underwriting when a key person s salary, a loan, or the value of the business increases a unique permanent inflation option that can increase the cover each year optional waiver of premium, total permanent disability and cover reinstatement guaranteed premiums for the whole of a fixed term, for ten years at a time with a rolling term, or for life with a whole life term immediate cover see page 25 for more details an instalment option, so the sum assured can be paid out over four years instead of as a cash sum ability to write in trust ability to assign to a lender You can find full details of Protect in the adviser guide About Protect. 24

25 Immediate cover with Protect Our immediate cover facility gives full life cover for 30 days. It is available for applications for Protect where: the life assured is aged under 60, and the sum assured does not exceed: 3 million for life cover only, or 1 million for life cover with total permanent disability benefit, and the Protect application is fully completed and no further medical evidence is needed because of any information disclosed (we will request further medical evidence as a matter of course if the sum assured exceeds specified limits), and we received all the financial information that we need, and an immediate cover facility form is signed and returned with the completed application form and direct debit instructions, or a cheque for the first premium. If the application does not qualify for the immediate cover facility, our normal underwriting procedures will apply. An example of the form you should use to apply for this facility is on the next two pages. Please ask your Old Mutual Wealth Sales Consultant for a copy when you need to use it. 25

26 Immediate cover with Protect (Continued) Example Sample immediate cover facility form IMMEDIATE COVER FACILITY FOR BUSINESS PROTECTION Use BLOCK CAPITALS only and use blue or black ink. 1 EXPLANATION The immediate cover facility is available at no extra cost for business assurance and key employee applications for Protect. Limits This facility is available to you provided: the life assured is aged 60 or under the sum assured does not exceed: Type of cover Life cover Life cover with total permanent disability benefit Facility available for sums assured up to 3 million 1 million If an applicant applies for more than one policy, the limits above apply to the total life cover. Cover will be provided from the date the application form is received at our Head Office. We will accept the application immediately providing: the limits shown above are not exceeded the Protect application form is fully completed and no further medical evidence is required as a consequence of any information disclosed (NB we will request further medical evidence as a matter of course if the sum assured exceeds specified limits) we have received any financial information that we require (see overleaf for details of when we will need this) this immediate cover facility form is signed and returned with a completed application form and direct debit instructions, or a cheque for the first premium. We will confirm the date the cover starts in writing. If we are unable to accept the application on standard terms, we will offer revised terms wherever possible. Cover would then start once you agree to these non-standard terms. In all cases, immediate cover will stop after 60 days if we do not receive satisfactory health information within this period (where we have requested it due to the size of the sum assured). The cover will stop earlier than 60 days if the information we receive means we cannot continue to provide cover on the same terms. We will cancel the relevant policy/policies from outset. Where we are able to offer revised terms, the cover will restart as a new policy/policies on these revised terms, subject to your consent. If cover ceases, we will let you know as soon as is practical and within 65 days from the date the immediate cover starts. We reserve the right to retain the premium under these circumstances. If the application does not qualify for the immediate cover facility, our normal underwriting procedures will apply. In all cases, the acceptance letter is sent out when the policy is issued and the cover starts. 1 of 2 26

27 2 DETAILS OF POLICYHOLDER(S) AND LIFE/LIVES ASSURED First policyholder First life assured Date of birth (day/month/year) Second policyholder (if any) Second life assured (if any) Date of birth (day/month/year) Please sign the declaration below. 3 DECLARATION I/We understand that you will cancel any cover under the immediate cover facility, if you do not receive satisfactory health information at your Head Office within 60 days of receiving the signed Protect application form. I/We understand that if you cancel any cover under the immediate cover facility, you will offer revised terms where possible. If I/we agree to these revised terms, then the cover would restart as a new policy/policies. I/We understand that if I/we have not enclosed a cheque for the first premium or completed a direct debit instruction with my/our application form, cover will not start until you have notified me/us that my/our application is acceptable and I/we have paid the first premium or provided a completed direct debit instruction. Signature of first policyholder Signature of second policyholder (if any) Date (day/month/year) Date (day/month/year) 4 FINANCIAL UNDERWRITING LIMITS This table shows the limits above which we will always need financial evidence. Types of evidence Class 1/2 Class 3 Class 4 Financial questionnaire (completed by you and your financial adviser) 800, , ,000 Independent financial evidence 1.5 million 1.25 million 1.25 million Class 1: office based professional, clerical and administrative work only. Class 2: occupations that are almost entirely managerial or administrative, but which are not office based. Class 3: occupations requiring skilled manual work. Class 4: occupations requiring heavy manual work or unskilled process working. If you require further clarification regarding the financial evidence required, please call our Underwriting Helpline between and Monday to Friday. Calls may be monitored and recorded for training purposes and to avoid misunderstandings. Old Mutual Wealth Life Assurance Limited is registered in England & Wales under number Registered Office at Old Mutual House, Portland Terrace, Southampton SO14 7EJ, United Kingdom. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Financial Services register number VAT number When printed by Old Mutual this item is produced on a mixed grade material, which uses a combination of recycled wood or paper fibre from controlled sources and virgin fibre sourced from well-managed, sustainable forests. PDF7801/ R/October of 2 27

28 How can we help you? We offer a comprehensive range of support to financial advisers, including personal contact, website and a full range of product literature. Contact us To get in touch with us, you can telephone your Old Mutual Wealth Protection Specialist or one of our helplines. Customer services (option 3) if you need guidance on completing a form or have questions about a policy our Customers Services team can help. Underwriting our underwriters will be happy to discuss any case with you before you send us the application. Talking through the details can avoid any delays in the underwriting process. Technical the Technical team will answer any technical queries about tax and financial planning. Our website You can find a range of sales and technical support material as well as information on our products on our website, adviser/business_protection/ The literature you might need Protect About Protect (adviser guide) 3 Application form 3 Key features document 3 Explaining Protect 3 General Business Assurance Trust 3 Illustrative Cross-Option Agreement 3 Old Mutual Wealth s trusts at a glance 3 Financial questionnaire 3 28

29 Further information If you have a question about corporate protection cover that we have not been able to cover in this guide, please contact us. We determine the benefits provided under the policy within the relevant Protect policy terms copies are available on request. This guide is based on Old Mutual Wealth s interpretation of the law and HM Revenue & Customs practice as at March While we believe this interpretation is correct, we cannot guarantee it. Tax relief may change in the future. We cannot guarantee the effectiveness of our sample trust documents, agreements or letters to HM Revenue & Customs, and would recommend that clients obtain their own legal advice. 29

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32 Please be aware that calls and electronic communications may be recorded for monitoring, regulatory and training purposes and records are available for at least five years. Old Mutual Wealth Life Assurance Limited is registered in England & Wales under number Registered Office at Old Mutual House, Portland Terrace, Southampton SO14 7EJ, United Kingdom. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Financial Services register number VAT number When printed by Old Mutual this item is produced on a mixed grade material, which uses a combination of recycled wood or paper fibre from controlled sources and virgin fibre sourced from well managed, sustainable forests. SK2737/ /March 2018