As we approach the summer months, it is a timely opportunity to reflect on the year to date and trends we are seeing from advisers.
One theme we have seen a growing amount of interest in is the world of business protection. Its specialist nature is resulting in a wide-ranging variety of enquiries on specific topics. These are the most frequent questions we are being asked about the subject.
1. If a client has very low income or no income at all, how much relevant life cover can they have?
There are no statutory limits on the amount of life cover someone can have, and the amount available will differ among providers. Many use a multiple of the client’s income to determine the maximum amount of coverage available.
As well as confirming the amount of cover required, it is crucial that the client is eligible for this type of cover.
To qualify, there needs to be an employer/employee relationship and the life assured must be actively performing a service for the business in the interest of generating profit, even if they are non-salaried.
Directors of a company, including shareholding directors, and officers of a company are treated as employees for this purpose. However, partners, LLP members and sole traders are not employees and therefore do not qualify. The same rules apply to non-working directors/shareholders.
2. Can business property relief be affected by a share protection arrangement?
This depends on whether any cross-option agreement is drafted appropriately. So, the first step is to check the articles of association and review any existing arrangements.
A cross-option agreement gives surviving shareholders the option to buy shares from the deceased shareholder’s personal representatives and vice versa. Both parties must be in agreement and if either side wants to exercise their options, the other party must comply. Cross-option agreements can only be exercised after death for relevant life policies.
If someone dies owning shares in an unquoted trading company, 100 per cent BPR may be available for Inheritance tax purposes, provided those shares have been held for at least two years.
BPR will still be available despite the deceased shareholder’s estate getting cash for the shares under the terms of a cross-option agreement. That is because options can only be exercised after death and the sale of the shares only becomes binding once an option has been exercised.
Since there is no binding agreement to sell at the date of death, BPR is not affected.
An option for surviving shareholders to buy a deceased shareholder’s interest is not exercisable until after death and so unenforceable until then. It follows that, immediately before death, the surviving shareholders’ option does not constitute a binding contract for sale.
Where BPR can be affected is when shareholders have arranged a buy-and-sell agreement so that on one of their deaths, the surviving shareholders are obliged to buy the deceased shareholders holding and the estate is obliged to sell. In the eyes of HMRC, this, at time of death, is a binding contract for a cash sum to enter the business.
