AXA Business Protection

AXA Business Protection Shareholder and Partnership Protection

Shareholder Protection Topics to cover… • Shareholder Protection • How it works • How to calculate cover • Legal Arrangements • Partnership Protection

Shareholder Protection Tax We offer some information about tax within this presentation. This information is based on our understanding of current UK Tax legislation. Tax rules are subject to change and their value depends on the customers circumstances.

Shareholder Protection What is it for? In the event of a major shareholder’s death, surviving shareholders are likely to want to purchase the available shares. Major shareholder’s have important voting rights which normally pass to the deceased’s Beneficiaries and could have a serious impact on the company.

Shareholder Protection What is it for? For example “GAD TECHNICAL LTD” run a financial planning company… 25% 25% 50% They own the above percentages of the company which is currently worth £400,000 Let us consider the situation should one of them die or become seriously ill. Example for illustrative purposes only

Shareholder Protection What is it for? If the deceased's shares pass to the wife Does she have the necessary skills to get involved in the business? Does she even want to get involved in the business? What if the company is currently paying dividends? What if she re-marries and her new husband wants to be involved in the business? What if she wants to sell to a third party? Is any of this what the continuing shareholders want?

Shareholder Protection What is it for? If the deceased's shares pass to the wife Does she have the necessary skills to get involved in the business? Does she even want to get involved in the business? What if the company is currently paying dividends? What if she re-marries and her new husband wants to be involved in the business? What if she wants to sell to a third party? Put arrangements in place to ensure that money is available in the right hands at the right time The Solution

Copies of company accounts can be obtained from Companies House for as little as £1 www.companieshouse.gov.uk/ Shareholder Protection Steps to writing business… • Calculate the appropriate amount of cover needed … Quoted Companies: Unquoted Companies: Net asset value + (multiple of net profit) = level of cover No. of shares x quoted price =level of cover The company’s accountant can supply an estimate of company’s value. This is relatively simple for tangible assets, more difficult for intangible assets such as goodwill

Shareholder Protection Steps to writing business… • Calculate the appropriate amount of cover needed … • Arrange cover on a suitable basis including trusts where appropriate… • Cover can be arranged either: • Leaving shares to spouse/family with arrangements for • continuing shareholders to purchase the shares; or • Arranging for the company to purchase • the shares on death

Shareholder Protection Arranging policies on Life of Another basis

TRUST TRUST TRUST Shareholder Protection Own Life Written Under Trust

Shareholder Protection Own Life Written Under Trust Pre Owned Asset Tax (POAT) • Trust provides flexibility should the settlor leave the business, the settlor is a beneficiary and benefits revert to him automatically under the trust. • HMRC’s view is that despite commerciality, the trust is a settlement and as the settlor can benefit, the POAT rules could apply. • However in practice, there would be no tax if the policy has no value or its value is such that the ascertained benefit (at 6.25% of the policy value) is less than the de minimis limit of £5,000. Therefore value (not sum assured) of policy will have to be in excess of £80,000 for a charge to apply (assuming the settlor has no other arrangements which are subject to POAT)

Shareholder Protection Unequal Premiums There are a number of solutions that tackle unequal premiums: • HMRC statement • Increase remuneration - Tax & N I? • Adjustment of premiums

AGE COVER PREMIUM 33 40 50 £400 £450 £1,500 £100,000 £100,000 £200,000 Shareholder Protection Adjustment of premiums G A D Total Premiums £2,350 Total Cover £400,000

(Sum assured on G x A’s Premium) (Total sum assured - sum assured on A) + (Sum assured on G x D’s Premium) (Total sum assured - sum assured on D) Shareholder Protection Adjustment of premiums Calculation for this Shareholder G A D

(100,000 x 450) (400,000 - 100,000) + (100,000 x 1,500) (400,000 - 200,000) Shareholder Protection Adjustment of premiums Calculation for this Shareholder G A D

Shareholder Protection Adjustment of premiums Calculation for this Shareholder G A = 150.00 + 750.00 = £900.00 D

Adjusted Premium Difference Total Premiums £2,350 Adjusted Cost Total Costs £2,350 £450 £1,500 £400 £900 £883 £567 +433 -933 +500 Shareholder Protection Adjustment of premiums G A D

Shareholder Protection Who pays the premiums • Generally, the company would pay the premiums • These would be treated as additional remuneration of the individual directors • They would be liable to income tax and N.I. on the premiums • The company would be liable to NI on the premiums but would get corporation tax relief

Total Liability National Insurance Income Tax Adjusted Cost £369 £900 £883 £567 £353 £226 £360 £5 £8 £9 £361 £231 Shareholder Protection Company paying premiums example G A D

Adjusted Cost Income Tax National Insurance Total Liability £2,350 £300 £2650 Net cost to company (assuming 20% corporation tax) = £2,120 Shareholder Protection Company paying premiums example

Shareholder Protection Steps to writing business… • Calculate the appropriate amount of cover needed … • Arrange cover on a suitable basis including trusts where appropriate… • Arrange legal agreements to cover the rights of each party…

Shares Policy Shareholder DOUBLE OPTION AGREEMENT Surviving Shareholders Shareholder Protection Double Option Agreement Spouse or Family

Shareholder Protection Double Option Agreement The Double Option Agreement gives: • The option for the continuing shareholders to purchase the shares from the personal representatives of the deceased shareholder within a fixed period; and • The personal representatives of the deceased shareholder the option to sell the shares to the continuing shareholders, also within a fixed period. (Not necessarily the same length of time) • Notes: • It only takes one party to the agreement to wish to • exercise the option for the agreement to become binding • If neither party exercises the option within the time • limit, the agreement expires

Critically Ill Shareholder Under a Double Option Agreement he may be forced to sell even if he doesn’t want to! IHT? Cash? CGT? Remaining Shareholders Shareholder Protection Single Option Agreement For Critical Illness Cover or Life or earlier CIC, it is important that a suitable legal agreement has been written Problem What if the ill shareholder wants to return to work?

Critically Ill Shareholder CIC Payout can exercise options SINGLE OPTION AGREEMENT Remaining Shareholders cannot force options Shareholder Protection Single Option Agreement For Critical Illness Cover or Life or earlier CIC, it is important that a suitable legal agreement has been written Solution

Shareholder Protection Single Option Agreement The Single Option Agreement gives: • The seriously ill shareholder the option to sell the shares to the continuing shareholders, within a fixed period • Notes: • If the seriously ill shareholder exercises the option • the agreement becomes binding on the continuing • shareholders • If the option is not exercised within the time limit, • the agreement expires

To achieve this, legal advice in the matter should be sought by the company Shareholder Protection Company Share Purchase • The “Companies Act 1981” gave companies the right to purchase their own shares • Companies must fulfil these criteria to allow buy back: • Articles of Association must allow it - pre ‘81 Co.s need to amend • Shares purchased from deceased’s personal representatives must be cancelled. As authorised share capital remains the same, other shareholdings increased proportionately • Directors must give statutory declaration of solvency, backed by favourable report from company’s auditors • HMRC require certain conditions to be satisfied if purchase to be treated as a capital transaction and not a distribution in the hands of the shareholder.

Partnership Protection Steps to writing business… Essentially the same as for Shareholder Protection, however:- • Must be consistent with Partnership Agreement • Adjusted premiums can be the first charge on partnership profits • Must be aware of potential for automatic accrual method whereby the partners enter into an agreement during lifetime which provides that on death, the value of the deceased partner’s goodwill automatically passes to the continuing partners

Cover Interest Shareholder • Possible IHT charge • on death • Reasonable financial • provision - I (PF & D) • Act 1975 Surviving Partners Partnership Protection Automatic Accrual… Spouse or Family

Partnership Protection Automatic Accrual… Each partner effects and maintains own life policy in trust for desired beneficiaries i.e. spouse and family • IHT on value of partnership interest – none assuming 100% business property relief is available • IHT on life policy - normally none if under an appropriate trust • Income Tax/Capital Gains Tax on life policy - normally no implications • IHT on premiums – gifts but normally within the various IHT exemptions • Tax relief on premiums – not applicable

Turnover Gross Profit Net Profit 2004 £3.4 million £1.3 million £328,000 2005 £3.4 million £1.2 million -£21,000 (loss) 2006 £3.3 million £1.3 million £490,000 Shareholder and Partnership Protection Case study… Your client is Male, 48 years old, amanaging director of Sapphire Group limited. The company supply chemicals to the brewery and catering industries. Have been in business for 4 years ago and employs 33 staff, has a 49% shareholding in the business. His business partner has a 51% share in the business. Business accounts reveal this picture: The directors have valued the company at £2.8 million Accounts received confirming figures from FQ and also that the net asset value of company was £500k.

Shareholder and Partnership Protection Case study… Questions… • Can you calculate the sums assured required for shareholder protection for the two directors? • What is the most flexible way in which shareholder protection can be arranged and why? • What should you check to ensure the shareholder arrangement is suitable for the business? • What additional documentation will be required to go with the trust forms? • Who pays the premiums? What are the tax implications? • What does ‘adjustment of premiums’ mean for the shareholders? • What happens after a claim has been made to the shares?

Read our: • AXA Protection Account - Business Protection Guide • Quick Reference FAQ • Or visit • www.axa.co.uk/advisers/protection Shareholder and Partnership Protection Questions and further information… Any Questions? For further information

AXA Business Protection