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The Importance of Business Protection

firstfriday
September 07, 2012
170

The Importance of Business Protection

Chris Hidson

firstfriday

September 07, 2012
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Transcript

  1. First Friday 7th September 2012
    1
    Presentation by Chris Hidson CeFA

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  2. Introduction to
    Business
    Protection
    For intermediary use only – not for use with your clients

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  3. Agenda
    3
    Why business protection?
    • Keyperson protection
    • Business liabilities
    • Shareholder and Partnership protection

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  4. The business protection market
    At the end of February 2011, there were over 2.7
    million registered companies in the UK*
    Business Protection gap defined as £1.1 trillion**
    Corporate debt gap just under £300bn
    Shareholder protection gap £400bn
    Key person protection gap £400bn**
    39% of business owners said their businesses
    would fold within 18 months of the death or critical
    illness of a key person**
    Sources
    * http://www.companieshouse.gov.uk/about/businessRegisterStat.shtml
    ** http://www.legalandgeneralcomms.co.uk/businessprotection/the-business-protection-gap.html

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  5. The Market
    5
    • 23.8% Sole Traders
    • 58.9% Companies
    • 13.2% Partnerships
    • 4.1% General Government & Non-profit
    *Source: http://www.statistics.gov.uk/cci/nugget.asp?id=1238 (Feb 2011)

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  6. Likelihood of partner/director
    dying before 65
    6
    Average age of
    partner/director
    Source: based on Office of National Statistics Interim Life
    Tables for UK Males between 2007 and 2009
    Number of partners/directors
    2 3 4 5 10
    30 28% 39% 49% 57% 81%
    35 28% 38% 48% 55% 80%
    40 27% 37% 46% 54% 79%
    45 25% 35% 44% 51% 76%
    50 23% 32% 40% 47% 72%

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  7. 7
    A business man has a
    chance of suffering a
    critical illness or dying
    before his/her 65th birthday
    1 in 3
    Source:http://zdownload.zurich.co.uk/document/pdf/zurich/campaigns/card2.pdf
    Loss of Keyperson….

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  8. How will it all end?
    8
    “When you’ve
    got to go, you’ve
    got to go…
    but will it be by
    falling off a ladder,
    falling out of bed
    – or simply walking
    down the street?”*
    *Mail on Sunday 07.03.2010
    1 in 258,326
    Ignition of nightwear
    1 in 35,904
    In the bath tub
    1 in 8,073
    Falling out of bed
    1 in 1,550
    Food poisoning
    1 in 207
    Medical error

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  9. Key person protection?
    Anyone whose loss, either
    permanent or temporary,
    would affect the company’s
    ability to maintain turnover
    and generate profits.
    9

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  10. Key person protection
    Provides funds to:
    • Underpin profits
    • Enables business to recruit and train a replacement
    • Support cash flow
    • Maintain value of business/shareholding
    10
    Risk and cash flow
    • Provides time and space to re-organise
    • Decreases unwanted attention from creditors

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  11. Business Liabilities
    • Directors’ Loan Accounts
    - Must be repaid on death
    • Business Loans
    - Banks may call in the loan on the death of a key person
    - Directors may have given personal guarantees
    • Overdrafts
    - recalled / reduced / reviewed by the bank
    • Redundancy costs
    - staff working for the key person / PA / administrators

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  12. Life of
    another plan
    ‘Key person’ solutions
    12
    ABC Ltd
    Director A £200,000 death or CIC
    Director
    A dies
    £200,000
    plan
    proceeds

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  13. Business
    Succession
    Planning
    Shareholder Protection
    • Protects the shareholders
    • Protects the families
    • Protects the employees
    • Protects the business

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  14. 14
    The issue
    Owner C
    Owner A
    Owner B
    Owner C
    Spouse A
    Owner B
    Owner C
    Owner B
    Ch ren
    ild
    A dies or
    even
    Problems for owner A’s beneficiaries:
    • Own a share of a company they may
    know nothing about
    • Loss of owner A’s income
    • No buyer for shares
    • If buyer found, at what price?
    • In addition to emotional issues with
    the loss.
    Problems for owners B and C
    • New shareholder(s) could cause
    unwanted interference
    • Loss of control
    • Cannot afford to buy shares from
    beneficiaries

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  15. The ‘company will’
    Most individuals have a personal Will to ensure assets
    are distributed according to their wishes

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  16. The 3 ways
    •Company Repurchase of own shares
    - complicated
    •Life of another
    - works for 2 shareholders / partners
    •Own life in trust
    - flexible

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  17. Solution
    17
    A POLICY IN
    TRUST
    Surviving
    Owners B and C
    B POLICY IN
    TRUST
    Surviving
    Owners A and C
    C POLICY IN
    TRUST
    Surviving
    Owners A and B

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  18. Meet the family man
    • Ali works for LBD Ltd, a small,
    successful company, and is a high
    earner.
    • Over the years he has built up a
    substantial pension fund.
    • He wants death in service benefit
    through the company and is
    worried about the benefits forming
    part of his lifetime allowance.

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  19. The solution
    The Company takes life cover out on
    Ali, pays for it and places it under a
    Relevant Life Policy Trust
    Life cover paid out on Ali’s death and
    paid to his family
    • Must be an employee, including
    directors.
    • The business can be a limited
    company, a partnership, a charity
    or a sole trader.
    • Cannot be used for sole traders
    or equity partners who are taxed
    under schedule D to provide
    cover for themselves.
    • 'Salaried' partners who are taxed
    as schedule E can be covered.

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  20. The savings
    Ali Ramat
    a shareholding
    director currently
    pays £200 a
    month for his
    life assurance.
    Cost to Ali as a Director paying personally
    Monthly premium = £200.00
    Pre-tax Income to fund £200 at Income Tax rate
    of 40%* and National Insurance at 2%* = £344.83
    Cost with employers National Insurance Contributions
    at 13.8% on this salary = £392.41
    Gross Salary and National Insurance are
    allowable deductions against Corporation Tax at 20%*
    Total monthly cost to Ali and LBD Ltd Company = £313.93

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  21. The savings
    LBD Ltd pays premiums through a relevant life plan
    Monthly premium = £200.00
    No employee Income Tax or National Insurance
    No employer National Insurance
    Relevant life policy is an allowable deduction against corporation tax at 20%*
    Total Cost to LBD Ltd Company = £160.00
    Cost to Ali and LBD Ltd company paying personally = £313.93
    Cost to LBD Ltd Company paying through RLPT = £160.00
    Saving = £ 153.93 or 49%

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  22. What can Mercury do for you?
    •Initial Consultation
    •Personalised Illustration
    from the Whole of the
    Market
    •Business Planning
    •Financial Advice

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  23. QUESTIONS
    QUESTI
    ONS

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  24. 24
    Chris Hidson
    Michael Farlam
    Jo Pazowski
    01227 811888

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