There are almost 5.5m SMEs in the UK (small and medium-sized enterprises). These are businesses with less than 250 employees, although the vast majority have less than 10 staff. But is each business doing enough to protect itself?
(Source: House of Commons, Briefing Paper, November 2016)
Surely it makes sense for a business to fully protect itself and the personnel who may have helped build up the company over recent years.
Here are a few key areas where some form of business protection may benefit the business, the shareholders, and its employees.
Key Person Insurance
This is designed to provide the business with the funds needed to cope with the financial impact of the loss of a key person in the company. Understandably, the death or serious illness of a key person can cause considerable disruption. This could include loss of sales, loss of customer confidence, the withdrawal of credit facilities or the cost of hiring or training a new recruit.
This enables the owners to keep control of the company, if one of them dies, or is diagnosed with a critical illness covered by the policy.
This plan will pay out a lump sum, which will help to provide funds to buy company shares. The pay out will then benefit his or her family, as the share in the partnership might have been their main financial asset, other than their home. For the remaining partners, it enables the smooth continuation of the business.
Business Loan Protection
If the business has outstanding loans, it may be prudent to take out some form of loan protection to cover the cost of the on-going payments or to pay off the loan in full, in the event that the bank calls in the loan prematurely.
The latter could be triggered by a fall in sales, a breach of the loan covenant, loss of credit insurance or the serious illness, or death, of a key person. If the finance has come from a director’s loan account, and the director were to die, then their estate might demand repayment of the outstanding loan. A business loan protection policy should apply in such circumstances and hopefully provide the business with a cash sum to help repay the loan.
Relevant Life Policy
This policy allows companies to offer a tax-efficient ‘death-in-service’ benefit to its employees (including salaried directors).
It’s designed to pay out a tax-free, lump sum on the death (or diagnosis of a terminal illness) of the person insured. With some providers the cover may go beyond this. The proceeds go directly to the employee/employee’s family or financial dependants.
– Even though the company makes the payments, they’re not treated as a benefit in kind, and would not be included in your income tax assessments. This could be a significant saving, particularly for a higher or additional rate taxpayer.
– Unlike a registered group life scheme, the benefit will not form part of your lifetime pension allowance, and premiums won’t form part of your annual pension allowance.
– The payments may be an allowable expense for the company in calculating their tax liability, as long as the local inspector of taxes is satisfied they qualify under the ‘wholly and exclusively’ rules.
To recap, this plan may be appropriate for:
– High-earning directors and employees who don’t want their death-in-service benefits to count towards their lifetime pension allowance.
– Small companies with too few members for a group life scheme that want to provide employees and directors with tax-efficient death-in-service benefits.
Talk to us…
These are just four brief examples of the protection policies on offer for businesses, with each meeting a different need. If this is relevant for you, then we can discuss, in greater detail, the key concerns for your own business, and identify a suitable way forward.