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.

It’s a no obligation call.

Get in touch today.