Director / Shareholder Protection Insurance

What is director share purchase / partnership protection? 

If a director or shareholder of your company were to become critically ill or pass away suddenly, your business could be financially at risk.

The guidelines may not be clear about where that key employee’s stake in the company will go and without the right measures in place, you could see your business lose money, as their share of the business could be left to their spouse or children, who may take over their share without much business knowledge or worse sell them to a competitor

However, shareholder protection or director share purchase cover could prevent this from happening, by protecting each of the shareholders through paying out a lump sum equivalent to the value of their stake in the business and allowing the remaining shareholders to purchase those remaining shares and retain control of the business.

This form of the policy can often be complex so it's always best to speak to a professional adviser before taking out such cover. Don’t hesitate to get in contact with one of our experienced IFA’s today for more advice and help with finding the perfect solution for your business. 

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What does Shareholder Protection or Partnership Protection mean and do I need it?

 Shareholder protection and Partnership protection are types of business protection insurance, which allows business owners to buyback shares in the company or a partnership from a shareholder or partner who is diagnosed with a critical illness or dies.

 Shareholder protection can provide your business with a critical safety net in such an event helping you and your remaining shareholders or business partners stay in control of your company or business and minimise disruption at what will already be a devastating time.

 Any business with multiple shareholders could benefit from shareholder protection or partnership protection insurance, regardless of size or industry.

 Without shareholder protection or partnership protection, it would be possible for one shareholder or partner to sell their shares or share of the business to a third party in the event of a critical illness or death, even against the will of the remaining shareholders or partners.

Shareholder Protection Insurance

When do I need to get Shareholder Protection or Partnership Protection?

 If you want to protect your business in the case of unforeseen tragedies it is worth looking at shareholder protection or partnership protection as early as possible.

 With shareholder protection or Partnershipprotection in place, you can have peace of mind within your business that any transition will be smooth with minimal disruption, with the knowledge that the bereaved families are also assured they have protection.

How do I set up Shareholder Protection or Partnership protection?

 The first job is to understand what level of shareholder protection cover your business requires.

 The amount of cover you’ll need will be dependent on the capital it would cost to buy out the covered shareholder or partner in the event of critical illness or death. 

 You can get a general idea of how much this would be by discussing it with your company accountant and between yourselves as owners of the business. An independent Financial Adviser can also assist you with this if required.

An Independent Financial Adviser can then recommend an appropriate protection provider to suit you and your business’s individual needs, then guide you through the process of setting up the plans, and appropriate trusts to ensure that the correct plans are in place for your business.  Your IFA and solicitor can also ensure that your limited companies memorandum of articles and association and partnership agreement mirror your share option agreement that would be put in place when you arrange your cover.

Does Shareholder Protection affect Shareholder rights?

 If correctly structured then Shareholder rights are unaffected, however its vitally important that you engage closely with a qualified Financial Adviser when setting up and reviewing Shareholder or partnership protection.

 Talk to your independent financial adviser for more information.

How is Shareholder Protection or Partnership protection Insurancecalculated?

You will need to have the personal information of the insured person to hand, including their age, lifestyle, and details around any pre-existing health conditions.

  • These will all be used to help calculate the premiums for your insurance.
  • When calculating the cost of protection cover there will be some key considerations:
  • The shareholders or partners influence on business profits

Who pays for Shareholder Protection Insurance and who owns the policy?

This would depend on the type of shareholder protection policy you decide to take out:

Life of another policy - This involves each business owner proposing Individual life policies on the other partners /shareholders. Premiums are calculated based on individual lifestyle factors and policy proceeds are made to the proposer in the event of a successful claim so they can purchase the shares.

Business trust - This involves individual shareholders having their own policy but written as a business trust so that in the case of death or critical illness, shares are split equally among the remaining shareholders.

How much does Shareholder Protection or Partnership Protection Insurance cost?

The cost of your shareholder or partnership protection insurance premiums will depend on a number of key personal indicators such as lifestyle factors and business indicators such as profits and shareholder contributions to the company.

Get in touch with your Independent Financial Adviser for a clearer indication of how much you’ll pay.

What are the tax implications of shareholder protection insurance?

Taking out shareholder protection insurance can be a helpful way of steering your company through the volatility of losing a shareholder through death or critical illness.

In these tragic circumstances, you have enough to deal with, without the worry of safeguarding your business’ future.

By having a shareholder protection insurance policy, you can be sure you and your fellow shareholders have the funds in place to secure outstanding shares in your company quickly, and smoothly, so your company can keep operating.

But, like any business expense, you should be aware of the tax implications you, or your business, might face and the responsibilities you’ll incur by taking out a policy.

Here, we’ll take you through some of the basic tax considerations associated with shareholder protection.


Is shareholder protection a benefit in kind?

Depending on the type of business protection you take out, it is possible that the policy could be classed as a benefit in kind.

A benefit in kind is a benefit you receive from the business, which is not included in your wages.

You’d need to fill out a p11d form for this.

This would be the case if the premiums for your policy are paid for through the business on behalf of the shareholders.

You should be aware of this if you do decide to purchase the policy through the business and want to register it as a business expense.

If you and your fellow shareholders took out individual insurance policies, which you paid for individually, it wouldn’t be considered a benefit in kind.

Will shareholder protection be liable for capital gains tax?

Typically no.

This is because shareholder agreements generally state the valuation of a shareholder’s shares in the company, which is used when working out the cost of the premiums when the policy is taken out.

It is this valuation that is used to dictate the cost of buying back the outgoing shares.

The only case in which shareholder protection insurance could become liable to capital gains tax, is if the value of the shares increase in the period starting when the shareholder dies or becomes critically ill, and the shares are sold to the remaining shareholders.

In this case, because the value of the shares has increased, it becomes liable for capital gains.

How does shareholder protection affect my income tax liabilities?

There are no income tax liabilities associated with policy proceeds from shareholder protection insurance.

If you are paying the premium on a policy yourself (rather than paying through the business) you will not personally benefit from any tax relief, and will be liable for income tax and national insurance on the value of the premiums.

Will I have to pay corporation tax on any claim proceeds from shareholder protection?

If the premiums on the business protection are paid for through the business, they can be claimed as a business expense and therefore may not be liable for corporation tax if a lump sum is paid out in the event of a death or critical illness.

This will need to be clarified with the local inspector of taxes prior to commencement of the policies

You, as an individual shareholder, could become liable for income tax and National Insurance payments on the policy however, if it is paid for through the company.

Will my beneficiaries pay inheritance tax on my shareholder protection policy?

Depending on how you structure your shareholder protection it is possible your family, or designated beneficiaries could be subject to some inheritance tax liability.

A potential solution for this is to arrange your shareholder protection policies so claim proceeds are made to a trust in the name of the surviving shareholders.

The claim proceeds to the trust would then be used by the shareholders to purchase the remaining shares, which is usually viewed as a commercial arrangement, and not liable for inheritance tax.

If you’re concerned about this particular issue you can get in touch with an expert at Rigby Financial who can guide you through the process in more detail.

Shareholder protection is a safety net for your company and family

Ultimately, taking out a shareholder protection policy provides you, your other shareholders and your family some financial peace of mind for what will already be a difficult time.

From a business standpoint, you will know your business can continue to operate without taking on debt or losing savings to purchase outgoing shares.

You can also rest assured that shares will remain within the company and not be sold to a third party.

From a personal point, yours and your shareholders’ families know that they’ll receive fair market for the shares they sell back to the company.

If you want to know more about how to set up shareholder protection insurance or have more questions about the tax implications of taking out a policy, get in touch with one of our experts today who can run you through the process.

What’s a cross option agreement?

This sets out who will buy back remaining shares and at what price those shares will be valued in the event a named shareholder dies or becomes critically ill and can’t continue in the business.

The agreement is typically made between the remaining shareholders in the business and the deceased or critically ill shareholder’s family or estate.

You can read our guide to cross option agreements here for more information.

Should my company get Shareholder Protection with critical illness cover?

There’s no requirement that you get critical illness cover as part of your Shareholder Protection so it really comes down to what level of cover you want, and what premiums you can afford.

Life only protection policies are cheaper because you’re only covering your business in the event of a death, but it could leave you open to problems if a shareholder does become critically ill and you need to buy them out.

You also might need to consider how any pre-existing conditions or lifestyle factors could impact the chances of getting critical illness cover, or whether an insurer will even cover you if a shareholder has a serious pre-existing condition.

Ultimately it does depend on what you can afford at the time and whether you want to risk getting a policy without critical illness cover, knowing it’s far more likely a shareholder could become ill in the future than suddenly pass away.

If you’re not sure you can speak to one of our advisors who will be able to recommend the best course of action based on your business’ individual circumstances.

Can Relevant Life Cover be used for Shareholder Protection?

You can’t use relevant life cover as a substitute for Shareholder Protection because relevant life cover is used as a form of death in service for companies with a relatively small workforce.

You can read more about how to set up relevant life cover by clicking here.

Can you take out Shareholder Protection insurance as a limited liability partnership?

You will be able to take out Shareholder Protection Insurance as an LLP.

Talk to one of our advisors about finding the right product based on your business’ needs and current circumstances to get the best deal.

How do I pay for Shareholder Protection?

A Shareholder Protection agreement works in the same way any other business insurance or personal insurance policy does.

Once you’ve agreed on the type of policy you want you’ll pay monthly premiums on the policy for the duration of the policy or until you make a claim.

Depending on the type of Shareholder Protection you take out, the premiums can either be paid through the business or by each individual shareholder.

If you want to know more about taking out a Shareholder Protection policy, get in touch.

How long does a Shareholder Protection policy last?

The duration of the policy is set at a term that you require at the time of arranging the cover. 

If a successful claim is made on the policy then cover will cease. 

The policy can be cancelled at any point however if you wish to rearrange cover at a later date then this will be subject to the policy being underwritten at that time which will usually result in an increase in premium.

IFA Disclosure: Rigby Financial is a trading name of Rainford Financial Services Ltd, which is Authorised & Regulated by the Financial Conduct Authority No. 627944. Registered in England No. 06048581