What is Life of Another Shareholder Protection?

Shareholder Protection Insurance protects your business, its shareholders and their families.

Should a shareholder die or become critically ill (if you’ve added Critical Illness Cover to your policy), it pays out. This provides the funds to allow for the business or the remaining shareholders to buy back the absent shareholder’s shares.

Moreover, it provides a willing and able buyer for the shares. This protects the shareholder / their family as it provides them with a lump sum in exchange for their shareholding.

There are three main ways to set up Shareholder Insurance:

• On a life of another basis
• On an own life under business trust basis
• Going down the company share purchase route.

This guide discusses life of another Shareholder Protection Insurance. Perhaps the simplest way to set up Shareholder Insurance, it is, however, only really viable where there are no more than two or potentially three shareholders.

What is Life of Another Shareholder Insurance?

Life of another Shareholder Protection sees each individual shareholder take out a policy on the life of their fellow shareholder(s). This means, should anything happen to the other shareholder(s), the individual who bought the policy based on that life receives the payout.

They can then use these funds to buy the absent shareholder’s shares, retaining control of the business.

Who Pays?

Individual shareholders pay for this type of Shareholder Insurance. This is from their own personal bank account and not from company funds.

This means that the individual also receives the benefit rather than the company.

How Does HMRC Tax Life of Another Shareholder Protection?

Each individual shareholder pays for the insurance personally based on the life of the other shareholder(s). This is from post-tax income, i.e. income that HMRC has already deducted all relevant taxes and national insurance contributions from.

Given this, there’s therefore usually no tax to worry about on premiums for the company. Moreover, as the individual receives the payout to buy the shares not the business, there’s also not usually tax concerns for the business on the payout, either.

Advantages

• The simplest form of Shareholder Protection Insurance to purchase and understand.
• There shouldn’t be tax implications for the business in most instances, given each policy is owned and paid for personally.
• Given the business doesn’t pay, it shouldn’t be considered a P11D benefit in kind for shareholders in most cases.
• No trust is usually necessary.

Disadvantages

The main disadvantage with this type of Shareholder Protection is that it’s only really viable with no more than two or potentially three shareholders.

This is because each individual shareholder has to hold a policy on the life of their fellow shareholder(s). This could quickly lead to an unwieldy and unmanageable number of policies.

For example, in a company with five shareholders, each shareholder would have to hold four policies on the lives of the other shareholders. That becomes a lot of policies to manage very quickly.

Also, a shareholder may leave the business, in which case they’d have no use for Life Insurance policies written on the lives of ex-colleagues. In such a situation you may be able to assign these policies to the departing shareholder’s replacement. However, doing so could harm the tax position of a life of another policy.

Get Shareholder Protection Quotes & Expert Advice

While life of another Shareholder Insurance is the simplest form of Shareholder Protection, that doesn’t mean it’s easy to arrange. Shareholder Protection is complicated, probably the most complex type of policy Drewberry assists its clients with.

Moreover, life of another Shareholder Insurance is only really a viable solution for a minority of companies (those with two or potentially three shareholders).

We recommend seeking the help of an expert adviser, such as one of the team at Drewberry, before arranging this cover. Going it alone can be a bit of a minefield — wouldn’t it make more sense to have an expert in your corner?

Why Speak to Us?

We started Drewberry™ because we were tired of being treated like a number.

We all deserve a first class service when it comes to things as important as protecting our finances. Below are just a few reasons why it makes sense to talk to us:

• There is no fee for our service.
• We are independent and work with all the leading UK insurers.
• You’ll speak to a dedicated expert from start to finish.
• We are very proud of the 3886 and growing independent client reviews rating us at 4.92 / 5.
• Benefit from the protection of regulated advice.
• Claims support when you need it most.

Simply pop us a call on 02084327333 or email help@drewberry.co.uk.