Business Protection Case Study: Protecting a Growing Company

When a client was introduced to us following an accountancy review, the original objective was straightforward. They wanted advice on their pension and to make sure their existing retirement planning was appropriate for their circumstances.

However, once we completed a wider review of the client's finances, income and business interests, it became clear that the pension was only one part of the picture. The client was 47, operated through a limited company and had responsibilities to both their family and the other shareholders in the business.

This led to a much broader conversation around business protection. We identified several areas where the client, their family and the company could be financially exposed if illness, injury or death affected one of the people responsible for the business.

The result was a protection strategy covering Income Protection, Key Person Insurance, a Relevant Life Policy and Shareholder Protection.

How the business protection review changed the advice

The original reason for the meeting was pension advice, but the wider financial review allowed us to consider what would happen if the client could no longer work or if something happened to one of the company's key shareholders.

The business protection review focused on four simple questions:

• What happens to the client's income if they cannot work?

• What happens to the company if a key person dies or becomes seriously ill?

• How can the client's family receive life cover through the company?

• What happens to the shares if one of the shareholders dies?

The recommendations were designed to work together, protecting the client personally, their family, the company and the other shareholders.

The protection arranged

Figures are based on this case study. Actual premiums and cover will depend on individual circumstances, underwriting and policy requirements.

Income Protection: what happens if the client cannot work?

The first question was a very simple one: what happens if the client becomes ill or injured and cannot work?

As a company director, their ability to work was closely connected to their income. If they were unable to work for a prolonged period, household bills and other commitments would still need to be paid.

We arranged £2,500 per month of Income Protection, with a one month deferred period and cover running until age 68. The premium was £57 per month.

The purpose was to provide the client with an income if illness or injury meant they could no longer work, subject to the terms of the policy.

MoneyHelper's guide to Income Protection explains how Income Protection works and what people should consider when arranging cover.

For this client, the one month deferred period was important because they wanted their income protected relatively quickly if they were unable to work.

Key Person Insurance: what happens if the business loses someone important?

The next question was about the company itself.

If the client died or became seriously ill, would the business simply carry on as normal?

The answer was no. The client was an important person within the company, so their absence could have created a financial impact through lost income, disruption, recruitment costs or the time needed to replace their skills and experience.

We therefore arranged £150,000 of Key Person Insurance at a premium of £23 per month.

In simple terms, the policy is there to provide the company with money if something happens to a key individual.

HMRC's guidance on Key Person Insurance explains that premiums can be allowable where the policy meets the relevant conditions and is taken out for the purpose of protecting the business against loss of trading income.

That tax treatment was an important part of this case. The premiums for the arrangements were payable by the company and, where the relevant conditions were met, were treated as allowable business expenses for corporation tax purposes.

Relevant Life: protecting the client's family

The next question was much more personal.

If the client died, would their family have enough financial protection?

A Relevant Life Policy was arranged for £250,000, costing £31 per month.

Rather than leaving the client to pay for the cover personally, the company arranged the policy as part of the client's overall remuneration and protection planning.

Relevant Life can be particularly useful for company directors who want individual life cover through their limited company. When correctly structured, it can provide tax advantages compared with simply paying for personal life cover from income that has already been taxed.

HMRC's guidance confirms that Relevant Life policies have specific tax treatment, including circumstances where premiums do not create a benefit in kind charge.

For this client, it meant their family had an additional £250,000 of life cover while the company could pay the premium as part of the overall financial planning strategy.

Shareholder Protection: what happens to the shares?

This was perhaps the easiest risk to overlook.

Imagine one of the shareholders dies. Their shares could pass to their children or other beneficiaries.

But would the children actually want to own part of the business?

And would the remaining shareholders want the children to become shareholders in the company?

The children may prefer to receive the value of the shares in cash instead. At the same time, the remaining shareholders may want to buy those shares so they can retain control of the business.

That creates another question:

Where would the remaining shareholders get the money to buy the shares?

This is where Shareholder Protection comes in.

A £250,000 Shareholder Protection arrangement was put in place at £31 per month. The idea is that, if a shareholder dies, the appropriate insurance proceeds can provide the money needed to support the agreed purchase of their shares.

However, the insurance is only one part of the solution.

A Shareholder Agreement is also important because it can set out what should happen to the shares if one of the shareholders dies. Without an appropriate agreement, there can be uncertainty around who receives the shares, who can buy them and how the transaction should work.

In this case, the business protection recommendation therefore needed to work alongside the company's legal arrangements.

Why was the tax treatment important?

One of the additional benefits for the client was that the protection was arranged through the limited company.

The premiums across the four policies came to £142 per month, as shown above. In this case, the premiums were treated as deductible business expenses for corporation tax purposes where the relevant conditions were satisfied.

That meant the client did not simply have to pay for all of the protection personally from post tax income.

However, the tax treatment of insurance is not identical for every policy. HMRC's guidance makes clear that whether premiums are deductible depends on what is being insured and the purpose for which the insurance has been taken out.

This is why getting the structure right is important.

Why did the accountant, financial adviser and solicitor all matter?

This case is a good example of how different professional advisers can work together.

The accountant initially identified the pension requirement and introduced the client for advice.

The financial adviser then looked at the wider financial position and identified the need for business protection, including Income Protection, Key Person Insurance, Relevant Life and Shareholder Protection.

The solicitor can then help ensure the legal arrangements, including any Shareholder Agreement, support what the shareholders actually want to happen.

Each adviser has a different role, but bringing those areas together can give a business owner a much clearer overall plan.

Do limited company directors need business protection?

They may. The key question is what would happen to the director, their family and the company if they could no longer work or died unexpectedly.

For a company that relies heavily on one or two directors, the financial impact can be significant.

Business protection can help address these risks through policies such as Income Protection, Key Person Insurance, Relevant Life and Shareholder Protection.

What is Shareholder Protection?

Shareholder Protection is designed to help deal with what happens when a shareholder dies.

Their shares may pass to their family, but the family may prefer the value of those shares rather than becoming involved in the business. The remaining shareholders may also want to buy those shares so they retain control.

The insurance can provide the money to help fund that purchase, while a Shareholder Agreement can set out how the process should work.

Can business protection premiums be tax deductible?

They can be, depending on the type of policy, how it is structured and why the business has taken it out.

In this case, the premiums were structured so that the relevant arrangements were treated as deductible business expenses for corporation tax purposes, subject to the applicable conditions.

This can make business protection particularly valuable because the company is not only protecting against potentially serious financial risks, but may also be able to obtain corporation tax relief on qualifying premiums.

What does this business protection case study show?

The client originally came to us because they wanted help with their pension.

A wider financial review uncovered something much bigger.

The client needed protection for their own income, their family, the company and the other shareholders. The resulting business protection strategy brought together £2,500 per month of Income Protection, £250,000 of Relevant Life Cover, £150,000 of Key Person Insurance and £250,000 of Shareholder Protection.

The total premiums were £142 per month.

More importantly, the client now had a plan for what could happen if illness, injury or death affected one of the people at the heart of the business.

It is a good example of why financial advice should not always stop at the original reason for the meeting. A pension review can sometimes uncover wider financial risks that need attention too.

If you are a company director or shareholder and have never reviewed your business protection, it may be worth looking at what would happen to your income, family, company and shareholders if something unexpected happened.

You can find out more about our wider approach through Independent Financial Advisers | Castle Stonebridge Financial Planning.

*Disclaimer: This article is for general information only and does not constitute personal financial advice. The suitability and cost of Income Protection will depend on your individual circumstances and the terms of the policy. This is one example and outcomes will vary depending on circumstances.