The Importance of Business Protection

Chris Hidson

Transcript

1. First Friday 7th September 2012 1 Presentation by Chris Hidson CeFA
2. Introduction to Business Protection For intermediary use only – not for use with your clients
3. Agenda 3 Why business protection? • Keyperson protection • Business liabilities • Shareholder and Partnership protection
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
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)
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%
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….
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
9. Key person protection? Anyone whose loss, either permanent or temporary, would affect the company’s ability to maintain turnover and generate profits. 9
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
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
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
13. Business Succession Planning Shareholder Protection • Protects the shareholders • Protects the families • Protects the employees • Protects the business
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
15. The ‘company will’ Most individuals have a personal Will to ensure assets are distributed according to their wishes
16. The 3 ways •Company Repurchase of own shares - complicated •Life of another - works for 2 shareholders / partners •Own life in trust - flexible
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
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.
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.
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
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%
22. What can Mercury do for you? •Initial Consultation •Personalised Illustration from the Whole of the Market •Business Planning •Financial Advice
23. QUESTIONS QUESTI ONS
24. 24 Chris Hidson Michael Farlam Jo Pazowski 01227 811888