How else can a business trust offer protection?
In the case study below, we show how planning ahead using tailored insurance policies within the business trust can help provide a brighter and more secure future for your family and business partner(s) should the worst happen.
In the example scenario, we consider the following policies:
- A relevant life plan (RLP) – Where the limited company takes out a policy on the individual that is then placed into trust for the individual’s chosen beneficiaries. These are extremely tax effective as they count as a business expense (rather than a personal cost), thus reducing Corporation Tax. Plan is a death-in-service benefit provided by the Employer.
- Shareholder protection planning – If you have multiple directors, consider shareholder protection planning. This could mean taking out a life insurance policy and placing this into a business trust for the benefit of another director(s). It’s important to draw up a Cross-Option Agreement alongside this as it gives the surviving director(s) and spouse the ability to initiate a trade. For example, if the surviving spouse wants to be involved in the running of the company or, conversely, if they want to trade their shares with the remaining director. The capital is paid into the trust – this means that Business Relief is maintained.
The levels and bases of taxation and reliefs from taxation can change at any time. The value of any tax relief depends on individual circumstances.
Cross-option agreements involve the referral to a service that is separate and distinct to those offered by St. James’s Place.
Scenario A: Death of a joint business owner with no business Will or insurance in place
- Married with two children
- Mortgage on main residence
- Main earner
- Joint 50/50 director of a limited company valued at £3 million
- No business Will or life insurance
Resulting situation upon the unexpected death of Director A:
The deceased’s family is left with a mortgage to be repaid and income required.
What happens to the business?
- The widow(er) is now the co-owner of the business and the co-director – Director B – is now working with a spouse who may have no interest in/ability to run it.
- Resultant impact on business – instability, loss of skill set, etc.
- The widow(er) needs cash to cover the mortgage etc.
- The business made no provision to buy shares of the business, so it will need to raise capital to buy out the spouse’s shares, which may not be possible.
- If Director B does exchange capital for the spouse’s shares, the estate has increased in value for Inheritance Tax purposes.
With no business Will, intestacy rules apply:
- The deceased’s estate passes to the spouse, but as the estate is valued at more than £322,000 (due to 50% of the business value being £1.5 million, plus 50% of the main residence and assets, etc.), the estate will be divided between the spouse/civil partner and the children of the deceased.
- The spouse/civil partner gets:
- Up to £322,000 in assets and half of the rest of the estate
- All of the personal possessions of the deceased.
- The children of the deceased are entitled to a share of the half of the estate above £270,000. Please note: additional rules apply if any of the children died before the deceased.
Scenario B: The same scenario but with a business Will, Relevant Life Plan (RLP) and shareholder protection planning all in place.
- This contains a trust which, upon death, will receive the shares from the business.
- The trustees are the surviving spouse and another family member. The beneficiaries of the trust are the surviving spouse and, ultimately, the children.
Relevant Life Plan (RLP)
- The limited company takes out a policy on the individual (in this case, Director A), which is then placed into trust for the individual’s chosen beneficiaries. The cover taken out amounts to a figure that would enable Director A’s to have sufficient DIS benefits to meet his needs. In short, we have made this business cost rather than a personal one.
Shareholder protection planning
- Having taken advice, both Director A and Director B agreed to effect shareholder protection planning.
- Director A took out a life policy for £1.5 million and places this into a business trust for the benefit of Director B.
- We also have a Cross-Option Agreement drawn up – this is critical. Now, if Director A dies, the £1.5 million pays out to the Trust, meaning Director B now has the capital to buy the shares.
- Director A’s shares pass into the trust upon death. The Cross-Option Agreement gives each party the ability to initiate the trade.
- The capital is exchanged for shares, with the capital being paid into the Trust – this means that Business Relief is maintained (i.e. no Inheritance Tax liability).
Resulting situation upon the unexpected death of Director A
- Director A’s family receives the full value of their shareholding in a tax-efficient manner.
- Director B, as the surviving shareholder, retains control of the limited company and can move forward accordingly.
- Director A’s family has to have sufficient DIS benefits to meet his needs via the proceeds from the Relevant Life Plan (RLP).
- Director A’s business Will has been drafted to their specific requirements, meaning their wishes are followed to the letter.