Retirement Investments Insurance. A guide to. Keyperson Assurance

Transcription

1 Retirement Investments Insurance A guide to Keyperson Assurance

2 A Keyperson is a person of significant value to the company

3 The Value of People All businesses, whether large or small, are heavily dependent on one key asset - their people. It is people who build up a successful business, not plant or machinery. The key directors and employees of a successful company bring: Experience, Knowledge, Expertise, and Contacts. Without these, the business would not succeed. Business Interruption But what would happen if one of these key people were to die or suffer an illness of a serious nature? In such circumstances, the profitability of the business could be interrupted and threatened by any of the following: The calling in of bank loans, for which the Keyperson had given a personal guarantee. The reduction or withdrawal of credit facilities by banks or suppliers worried about the future profitability of the business following the death or illness of the individual. The repayment to the Keyperson (or their estate) of any loans made by them to the company. The loss of the individual s expertise. The loss of the individual s business contacts and relationships, i.e. loss of goodwill. The need to commit resources to the recruitment of a suitable replacement. 1

4 Keyperson Assurance The key directors and employees of a successful company bring experience, knowledge and contacts to the business. Protecting the Business Keyperson Assurance is life assurance and/or specified illness cover taken out by an employer on a key director or employee, to protect the employer from the financial consequences of that individual s death or illness*. Putting Keyperson Assurance in place provides the business with a lump sum payment which can help protect against loss of profits that may arise from the death or diagnosis of a specified illness of a key director or employee, much in the same way as a company will normally insure against loss of trading profits resulting from fire and other risks. The Benefits By having Keyperson Assurance, the company will receive an immediate pre-determined lump sum payment on the death or diagnosis of a specified illness of the individual insured under the policy. The company is free to use these funds in any way it wants. It could: Pay off outstanding bank loans Repay any loans made by the individual to the company Recruit a suitable successor Invest the funds in the business * Separate policies must be effected to cover life and/or specified illness. 2

5 How to Arrange Cover The Steps There are a number of steps involved in putting Keyperson Assurance in place: Who should be insured? How much cover is required? Passing a Board Resolution Proposing for the Policy Issue of the policy and payment of the first premium. Who should be insured? The company can insure any director or employee on whom the business depends for its continued success, and whose death or diagnosis of a specified illness could result in the business suffering a financial loss. How much cover? To determine the amount of cover needed to insure a key individual, the following should be considered: Loans personally guaranteed by the individual and/or any loans made by that individual to the company. Estimated loss of profits resulting from the death or specified illness of the individual, including the costs of recruiting a replacement. This may be difficult to estimate in advance, and may differ from one individual to another, depending on their particular expertise and experience. One rule of thumb is to take a multiple, say 5-10 times, the individual s current annual remuneration. 3

6 Company Law Requirements/ Board Resolution Before a company takes out a Keyperson Assurance policy, the company s Memorandum of Association should be checked, and amended if necessary, to ensure that the company has the necessary authority to effect the policy. It is also recommended that the directors of the company pass a Board Resolution, recording their intention to effect the Keyperson Assurance cover with Aviva Life & Pensions Ireland. A specimen Board Resolution is set out below* It is resolved that XYZ Ltd. shall effect a Keyperson Assurance policy with Aviva Life & Pensions Ireland to protect against the financial consequences resulting from the death or specified illness of Mr X, while in the service of XYZ Ltd. Mr Y is hereby authorised to complete all the necessary documentation on behalf of XYZ Ltd. and it is hereby declared that the proceeds of the policy beneficially belong at all times to XYZ Ltd. * This resolution is only intended as a guide and professional advice should be sought before effecting a Keyperson Assurance policy. 4

7 The company might insure any director or employee on whom the business depends for its continued success Proposing for the policy The policy is set up as a Life of Another policy whereby: The life assured is the individual who is to be insured under the policy, and the company is the policy owner or grantee. The individual to be insured must complete the application form and sign it as the life assured. An Authorised Officer of the company should sign the application form for and on behalf of the company, as the grantee. It is required that the company s stamp should be affixed to the proposal form over the signature of the Authorised Officer. It is also recommended that the individual insured under the policy, and the Authorised Officer of the company, be different people. Please note that: The individual to be insured may be required to attend a medical examination. The company may be asked to complete a Financial Questionnaire to enable Aviva Life & Pensions Ireland to underwrite the amount of cover proposed. Issue of the policy When the proposal is accepted and the first premium is paid to Aviva Life & Pensions Ireland, the policy is then issued to the company. If the individual insured under the policy subsequently dies or suffers a specified illness as provided under the policy while the policy is in force, the sum assured is paid directly to the company as grantee. This is where a protection policy is effected on the life of an individual for the benefit of another. 5

8 Taxation of the Policy Premiums Generally speaking, Keyperson Assurance premiums are not admissible deductions for Corporation Tax purposes. However, the Revenue Commissioners have outlined the circumstances in which such premiums may qualify as admissible deductions*, where: A. The sole relationship is that of employer and employee, and B. The employee has no substantial proprietary interest in the business, and C. The insurance is intended to meet the loss of profits resulting from the loss of the services of the employee, as distinct from the repayment of loans, and D. The policy is a short term insurance, providing only for a sum to be paid in the event of death or specified illness. Source: Revenue Commissioners Tax Briefing 11 - July * See Page 8 for further guidelines on tax deductions. Where all of the above conditions are met, the premiums are admissible deductions for Corporation Tax. Where one or more of the above conditions are not met, the premiums are not admissible deductions for Corporation Tax. For example, premiums on a Keyperson Assurance policy effected solely for the purpose of repaying loans on the death and/or diagnosis of a specified illness of the individual, would not be admissible deductions for Corporation Tax purposes. IMPORTANT Under the Self-Assessment system, the onus rests with the company to satisfy itself with regards to the tax treatment of the premiums and proceeds of a Keyperson Assurance policy. Before proceeding with the policy, we strongly recommend that the company should familiarise itself with the tax implications of effecting a Keyperson Assurance policy. If in any doubt about its position, a company should seek independent professional taxation advice. 6

9 Proceeds The Revenue Commissioners set out their general position regarding the taxation of the proceeds in the hands of the company as follows: While the allowability of a premium or the chargeability of a benefit are strictly separate issues, it will usually be the case that: A. If the premiums are allowable for tax purposes, the benefit is chargeable to tax, B. If the premiums are not allowable for tax purposes, the benefit is not chargeable to tax. However, it would not be accepted that a benefit is not chargeable to tax simply because an employer decided not to claim a tax deduction for the premiums. Source: Revenue Commissioners Tax Briefing 11 - July

10 Further guidelines on Tax Deductions The following is an extract from the Revenue Commissioners Tax Briefing publication with regard to the admissibility of Keyperson Assurance premiums as an allowable deduction for Corporation Tax: the allowability or otherwise of premiums paid will be determined by reference to the terms and purposes of the policy In applying the conditions A to D (see page 6), the following guidelines are followed: Employee is taken as including a Director. A person who directly or indirectly owns or is able to control more than 15% of the ordinary share capital of a company is regarded as having a substantial proprietary interest in the company. The policy must be for a fixed term with no surrender value and no endowment or other investment content; it must not contain provisions whereby benefits could be paid to any person other than the employer. The insurance must be related to loss of profits only and it will be necessary to satisfy the Inspector of Taxes that the contingency insured against will genuinely have an adverse effect on the employer s business. Premiums on policies taken out to cover loans or other outstanding debts, which become repayable on the death of an employee, are not admissible deductions. In general, short-term means not exceeding five years. However, in practice, a fixed term policy exceeding five years will be accepted provided that all other conditions are met and the policy cannot extend beyond the employee s likely period of service with the employer e.g. for the period of the contract of service or to normal retirement age. Source: Revenue Commissioners Tax Briefing 11 - July

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12 Keyperson Assurance Some examples Keyperson Assurance - Company Owner Q ABC Ltd. wish to take out Keyperson Assurance to cover a director who owns 60% of the company. They wish to protect the company against the financial loss it would suffer if he/she were to die or suffer a specified illness. What is the tax position with regard to the Keyperson Assurance premiums and the potential policy proceeds? Keyperson Assurance - Employee Q ABC Ltd. wish to take out Keyperson Assurance to cover their top sales manager for 500,000. They wish to protect the company against the loss of profits (loss of revenue and the costs involved in recruiting a successor) it would suffer if he/she were to die or suffer a specified illness. A Premiums: A Corporation Tax deduction cannot be claimed on the premiums as the director is deemed to be a proprietary director. Proceeds: Any potential proceeds will not be subject to Corporation Tax. A What is the tax position with regard to the Keyperson Assurance premiums and the potential policy proceeds? Premiums: A Corporation Tax deduction is allowable as all the Revenue Commissioners conditions are satisfied. The type of loss being insured against here is loss of profits. The relationship is that of an employee & employer, the employee has no substantial proprietary interest in the business and the insurance is intended to meet the loss of profits resulting from the loss of the employee. Proceeds: In the event that a benefit is paid under the policy, it would be subject to Corporation Tax i.e. the proceeds are accounted for as if they were the gross profits of the company. 10

13 Keyperson Assurance - Loan Q ABC Ltd. has taken out a loan of 500,000 to purchase a commercial building. The company is eager to arrange Keyperson Assurance cover to secure the borrowing. What is the tax position with regard to the Keyperson Assurance premiums and the potential policy proceeds? A Premiums: A Corporation Tax deduction cannot be claimed on the premiums as the loan cover relates to a capital borrowing. Therefore, a tax deduction is not allowable. Proceeds: Any potential policy proceeds would be capital in nature as the loan was taken out to protect against a capital loss and would not be taxable. 11

14 Notes: This guide has been drafted by Aviva Life & Pensions Ireland and should be read in conjunction with the product brochure and key features document supplied by your Financial Adviser. It is not intended to be comprehensive and should not be used as a substitute for legal/taxation advice. We recommend that legal and/or taxation advice should be sought to confirm suitability. While great care has been taken to ensure the accuracy of this information, Aviva Life & Pensions Ireland cannot accept any responsibility for error or omission. Applicants for Specified Illness Cover should refer to our Specified Illness Definitions Brochure and standard restrictions section in our Protection Cover Brochure for details of the restrictions, conditions and exclusions that apply to this cover. When considering the protection needs of your company, you should discuss the position with your Financial Adviser who will discuss any queries you may have in relation to the content of this guide. 12

15 This guide has been produced by Aviva Life & Pensions Ireland and great care has been taken to ensure the accuracy of the information it contains. However the company cannot accept responsibility for its interpretation, nor does it provide legal or tax advice. This guide is based on Aviva Life & Pensions Ireland understanding of the law and Revenue practice current in July The information contained in this guide is mainly of an outline nature; further details will be given to customers, on an individual basis, at their meetings with a Financial Adviser. Changes in the legislation governing life assurance policies and taxation may, of course, be made by the Government at any time.

16 Retirement Investments Insurance Aviva Life & Pensions UK Limited, trading as Aviva Life & Pensions Ireland, is authorised by the Prudential Regulation Authority in the UK and is regulated by the Central Bank of Ireland for conduct of business rules. Aviva Life & Pensions UK Limited, trading as Aviva Life & Pensions Ireland, is also regulated in the UK: by the Prudential Regulation Authority for prudential rules and, to a limited extent, by the Financial Conduct Authority for applicable UK conduct rules. Registered Branch Office in Ireland (No ) at One Park Place, Hatch Street, Dublin 2. Tel (01) Web Registered in England ( ) at Wellington Row, York, YO90 1WR