00:06

Hi, everyone, we are on Season Eight, Episode 13. And states trust me, and I’m gonna be taking you through some of the key points of shareholder protection insurance. This is the practical protection podcast.

 

00:27

So this is going to be not a particularly long podcast episode, I say that but we all know that I do talk quite extensively. So I’ll try and do my best to keep it as as short as possible. So we’re just gonna be doing a little bit of a, an overview of shareholder protection, really some of the key points that you need to be aware of as an advisor, the places that things can go wrong. And, and, you know, it’s the kind of thing where Michelle protection, what I always found really, really useful. And I’m sure that many of you would find this useful as well is, if I was going to be doing a new kind of insurance policy, I had not done child protection for a while or anything like that, then I would literally go to google my child protection, and then an insurer was name, just pick an issue that you’d like in a sense, or that you want to choose one that pops into your mind. And what you do tend to find on the shows websites is that they do have really, really good pages that take you through examples of how shield protection works. And they’ll be written by the specialist from the insurer who who do this day in, day out. So you know, they really, really know that stuff. So strongly suggest that you do that. On the cure Insurance website, there is also some child protection pages as obviously this that you can refer to as well.

 

01:41

And, you know, just refamiliarise yourself if you’ve not done it for a while, because things can obviously change. And if so if you don’t do this day in day out, it can, you know, it’s not always at the front of your mind. And there are certain things that we really, really do need to know, especially in terms of the taxation issues that we can potentially see in terms of business protection. So it’s one of those things that

 

02:02

not really to dabble in, and just kind of dabble in a whim. In a sense, doublings fine. But as long as if you are dabbling, if you just the idea is not really your comfort zone, not something you’ve done much of not something you’ve done in a while, then do reach out to those specialists, I have to say for myself as well. I’ve always found with insurers that they do have a say there’s brilliant business protection specialists that sit within the company. And they are incredibly helpful if you do reach out to them and just say to them, Oh, can you just take me through this? Can you take me through that? So, so helpful, sometimes, obviously, they’ll be able to put in together and training for you specifically for your team and getting you like the really, in that, you know, see any kind of business people who know all the taxations know the laws and the different things that are going around with them. So so let’s get into the shared protection side of things. So basically, shareholder protection, what we’re doing is we’re protecting the shareholders family, we’re protecting the shareholder themselves, and we’re protecting the company. And what could be quite interesting, I think some people don’t necessarily think about shareholder protection, and quite a few different business protection policies that are there is that we are speaking to the individual, often, we are speaking to the shareholder, and the shareholder is obviously our client, but the business is our client. And I think that is something that kind of gets missed at times, you know, ultimately, the shareholders very likely the business owner or the business owners usually.

 

03:29

And, yes, they are the ones that were speaking to, but the entity, the company itself, is the client. So when we’re doing our recommendation reports, when we’re looking at things, that shouldn’t really be, in a sense, too much personal kind of circumstances bought into it and things like that, because ultimately, and I say personal puzzles, I’m talking mortgages, things like that, because ultimately, this has to do with the business needs. And what we’re wanting to do, and we can do shelf protection for a number of different things like life insurance, critical illness cover. But for the purpose of this podcast, I’m just going to refer to life insurance, because it’s just less words for me to say and obviously nicer for me, so forgive me for that. But just remember, we can on some of these interchange it with critical illness cover. So what we’re trying to do is make sure that say like if the shareholder dies, that their family receives a fair value for the shares that they held. And and obviously, if there was become critically ill that they themselves receive a share of fair value for the for the shares, and at the same time is that we’re making sure that the business retains those shares, and is able to keep the shares or I say, retain it, depending upon how technical you want to be with me, that can maybe not be the case, depending upon the type of shareholder protection that we’re doing. But basically we wanting the company to keep the shares and is really sort of a simple, I would hope easy way to think about this is let’s say we’ve got three shareholders and they’ve all got equal shareholding which means that it’d be

 

05:00

You know, if you have a third of a business each that basically on that level, you do have what’s known as a, as a, like a vetoing power, you do have absolute authority to make decisions in the company. So if the company might go on direction, you need all the shareholders involved. If one of them says no, then that can stop the plans, because of the amount of shareholding that somebody has. So let’s say of these three shareholders, one of them has passed away. And we don’t have a shareholder agreement in place in terms of the insurances and certain costs, option agreements that will sort of quickly go over. And what we will find, though, is that the next of kin words, then receive shares obviously don’t get inherited. Now, the problem is, is that the shareholders passed away his next of kin is their 19 year old kid who’s just got out of college, absolutely no business knowledge, and doesn’t know anything about the industry that the company is in, or anything about the relationships that, you know, they’re quite, you know, happy to come in and think we’re, hey, I’ve got this business. Now, this is obviously the crops are gonna be upset about obviously losing a parents usually. But you know, they’re going to be thinking brilliant. But the problem is, is that they don’t understand anything, and they’re wanting to do something super radical and looks so young, and thinks that the business needs to take a new direction, which might be here might be a brilliant decision. But it might not be as well. And what we don’t want is for the current, you know, the existing shareholders with all this knowledge, all these business relationships, that they have all these plans going forward, these forecasts the strategies, they go ahead to do them, and this, this kid comes along goes, no,

 

06:36

not doing that. And then they can’t do anything. So that’s why it is really important. I was saying that protecting the business, as well as protecting those existing shareholders. There are a few types of shareholder protection that we can do. And we do have cross option agreements and company buyback that we’re going to be focusing on today, there was another one, but it does have potential inheritance tax issues. So we don’t tend to go really go into that area. And I’ve, in my time of advising not needed to use that approach, I would have used this cross option or complete BiPAC, depending upon the client’s situation. And so we’re gonna go through them because they are the more usual ones that we’ll be doing. And there’s probably more for me to go through in some ways with the cost option and mistake that from the start just on the basis that I’m going to be explaining the whole shareholder thing. So it’s gonna seem like company buyback has a lot less for me to talk through. But because I’ve already started, already discussed a lot of the fundamentals that will need to be discussing. So let’s have a look at cost option, shareholder agreements. Now when you’re doing this, you would ideally want to see the articles of association that accompany halls that’s kind of like their business rules manuals that they have kind of set up with a company X, you’d want to make sure there’s no conflict. Now, a lot of the time, you know, about 80% of business in the UK, SMEs, so they are small businesses, a lot of them are family run. And so probably the owners or shareholders are gonna have a very, very good idea about what those articles of association say. It might be that when you’re recommending as well and this that you end up speaking with accountants, you might end up speaking with solicitors, you might even end up speaking to em taxation advisors, as well for the represent the company or the individuals in the company. So don’t be trying not to be put off by that I say this from experience, in the sense of I was giving somebody some child protection guidance, and there was somebody that was advising had a tax advisor who was saying that I was doing everything wrong. And I was getting I got myself so paranoid, because I kind of thought, oh my word, there’s a tax advisor here saying, I’m doing everything wrong, I must be doing everything wrong, I must have you know, like, just not understood any of this, you know, even though I knew I knew it all. And obviously, I spoke with the insurers and I went to the specialist that I just mentioned before those really key business specialists and insurers and they were absolutely amazing. And they will just sort of like know, you’re doing it. All right, the tax advisors wrong. And I think probably especially if you’re new ish to advising, it can be a real you can feel really paranoid at times as to whether or not you are doing things right or not, I mean, obviously, it’s each person to their own personality. And I’m somebody who can suddenly feel very like oh, I’ve done it wrong. You know, if somebody questions me and sort of like in there from like, what I consider like a position of real maybe authority in a certain you know, this was a tax advisor you know, I’ve seen all sorts where you get like, maybe an accountant needs article Why Well, the accountant must know much but ultimately, when you are learning about these things, when you are advising do stick to your guns, you know what I did in that situation as I held my own when I was speaking I say no, I’m pretty sure I’m right. But I will go and double check. That’s the best thing to do is always say, Look, I’m pretty sure I’m right. But I will double check. I went and check to the business specialists. I got everything written down that needs to be written down to explain that I was in fact right. And I went back and and ultimately the I have to say the tax advisor learned something new

 

10:00

So do stick to your guns if you need to, but always be prepared to be humble and check as well.

 

10:05

So, with a cross option agreement, this is a certain way of doing shareholder protection and which some companies, it’s not going to be the most favourite option. And I will get to that, as we get that, but with cost option agreements, what it can be, it can be an own life policy, and this went into trust with you, the shareholders, or it can be a life of another business policy, life insurance policy. Listen, obviously for for the other shareholders to be benefiting from it. Now, when we do live with another, that’s, that can be okay. But it can get messy if there’s more than a few shareholders. So a lot of the time, it can just be simplest to own life into trust for the shareholders, because then what we do is we have one policy, then we have the trust, which then listed the shareholders, which is really quite nice and simple and straightforward. If we do it as a life of another, then the difficulty we have is that each shareholder then needs to take out a policy on each of the the shareholders. So we can start getting huge amounts of policies being written, it can get very, very complicated. There are different ways that different people want to do it, depending upon situations. But usually, you know, I would say if you’ve got more than three shareholders, and it’s probably nicer for everyone involved, if we just do own life policy to trust. And what’s gonna happen with this is the accountants gonna value the company, and then you’re going to look to arrange a life insurance policy to match the value of the shares. And you can find that once you reach a certain amount of share value, across the company that Some insurers will want to see financial accounts to prove the shared values. As I say, 80% of SMEs are

 

11:52

independent businesses in the UK, SMEs, not all of them have shared values that are going to start going into that kind of a level, we can go quite high. Before we need to start really going into the financial account side of things I did in a shareholder protection one. So it was quite a few people, five or six people in the company, they’re willing to share protection for and the majority of insurers are just that yeah, will insure this person for this very for this very for this because we weren’t reaching financial underwriting limits per person when we broke it down the value of those shares per person. But then one insurer had said, well, actually, because across the market, this is going to be more than 3 million, we actually want financial underwriting on the policies you’re putting with those. So do keep an eye on that. It is a cost nicer if you can keep all the policies with one insurer. But as we all know, many of us who are listening to this, there are many things that can change, which ensures best we’ve got health, we’ve got travel, we’ve got sports. And whilst you know, we could potentially keep it all with one company. And we can say that to the client, you know, keep it all here. But this means that actually, there’s a slightly cheaper option for this person over there.

 

13:04

But let’s keep all together to keep it simple, sometimes might want to do that. But you do really, especially from a consumer duty point of view, you do really want to let them know about that cheaper option, because ultimately, it doesn’t actually make that big a difference. Because with the shareholder protection, the cross option agreement, we will be putting a cost option agreement in place, which is just a document that would sit with the Articles of Association. And it basically says if something happens to this person, these people are going to receive, you know, the shares, in a sense, which is obviously lovely, and exactly what you want it to do. Now, when I did it, and obviously we always have to check with each individual case, but I had it where I had this family say with quite a few people. And three different insurers were better for these people depending upon their risks. And I said to the insurers, I have a what do I do in terms of costs option agreement? Can I even do this across three of you? And the right, absolutely you can do but what you just need to be aware of is that you need to choose a cross option agreements, and use that for all of us, in a sense. So I was like, Oh, thank you. And I got this confirmation from each of the insurers. And so I just picked the nicest one, they basically say just pick the nicest one out of the three insurers. So I went from the nicest one, the simplest one. Very, very simple, nice and easy for the for the clients to understand, and we’ve got it all done and dusted.

 

14:25

But the reason that cross option agreement isn’t always the favourite option is that the premiums can be offset against corporation tax, but they are classed as a p 11. D benefits. So that does mean that the shareholders are paying for those policies and personally, which as a business owner, they’re going to prefer the option where they don’t have to pay for it personally. And depending on the size of the premium. As a you might get accountants coming in tax advisers coming in saying hang on a minute, we don’t want this person paying as much money and things like that. But there’s a really interesting thing with cross option agreements that we need to

 

15:00

Be aware of. And that is something known as premium equalisation. And this must be done on a cross option agreement for shareholder protection. Because if it isn’t, hey HMRC could see the payout as a gift. So we really, really want to be careful about this.

 

15:15

With premium equalisation, what happens is each shareholder pays for or towards the other shareholders premiums.

 

15:25

And if we’re doing on an own life policy interest. So I’ll take up an example hopefully to make it easy as easy as possible. So we’ve got two people or two shareholders, Mr. Ray and Mrs. Beam. So Mr. A, is going to pay the premiums for Mrs. B’s policy, because Mr. A will be benefiting from it, if Mrs. B does pass away.

 

15:49

So it which is obviously exactly what we would want it to be doing, and vice versa. So then when you have three people, you’ll find that say, Mr. A, Mrs. B. And I say, Dr. C. So something happens about what let’s just say we won’t get to claim here. So we’re going to go set these policies up. So what happens is, Mr. A, and Mrs. B, equally paid towards Dr. C’s, shareholders share sorry, protection insurance, because again, they’re both going to equally

 

16:20

going to benefit from that policy. I say equally, I’m assuming here that everyone’s got the same amount of shareholding. Obviously, people with different shareholding would come into it. But this might sound like quite intense. The accountants will be doing this, you’re not the one that’s responsible for doing those calculations with premium equalisation. Some insurers are able to help and give you the calculation. So you can say to the people, right, this is what needs to happen us pay this for this one, and you need to pay for this for this one. But ultimately, it’s the accountants that are responsible for sorting that, that it’s your responsibility as the advisor to make sure that the person is aware, and that their accountant is aware that the premium equalisation needs to be done. So when you’re doing your demands and needs report your recommendation letter, just make sure we’ve got a statement in there saying that this premium utilisation must be done has to be done, the accountant needs to do it also is potential as I say that it could be seen as a gift, which we certainly want to avoid, if at all possible.

 

17:17

So let’s have a look at company buy back now. So this is the one where it gets its money, it’s a bit fluffy, I have to say maybe people in business side of things wouldn’t see it as fluffy. But for me, it feels a bit fafi. And, but it can certainly work. And you know, you can certainly get to a point where people are really insistent they want to do is because the premiums are paid for by the company, which is as a company owner, they’re probably gonna want that, which is obviously, you know, something that’s I’m comparing myself, I would much rather the company pay for something than we pay for it myself. But there are some potential drawbacks that we should be really, really mindful of when we’re speaking to people about this. So we set it for the life of another policy, and it’s paid for by the company, which is very, very tempting to say to the shareholders, cuz we’re not paying for the payments ourselves. But it doesn’t get corporation tax relief. So just be mindful of that too.

 

18:10

And you need to have been a shareholder for three years to really be able to access company buyback, you can do it without the three year but I think there’s some potential for issues with taxation. So again, just be really mindful of that, as you know, we would usually say to try and avoid as much as possible, like any Aaron’s kind of taxation is that we don’t want to see that we ideally want to have three years of being a shareholder for that company to be able to do this. So. So the company is very excited, you’ve given them an option and don’t need to pay the premiums for themselves.

 

18:43

But let’s say one of the shareholders dies. Well, we’ll do Mr. And Mrs. B. Again, I’m just gonna keep to two people, because it’s easier for me. So let’s say that Mr. A dice.

 

18:58

And what that means with a company buyback arrangements, Mrs. B needs to make a statement to the Registrar of Companies that Mr. Ayer has died. And this also has to be a statement it was something known as the Gazette. I don’t know what the gazetteers are kind of, I don’t know, in my mind, I keep imagining, like some kind of film noir office with somebody with a cigar and you know, there’s just like these newspapers getting reeled off and all this kind of stuff. I’m sure it’s not like that anymore. Maybe it was never like that anyway. But anyway, and so this because that thing, okay. And what that is, is a Gazette is something where business people and creditors, especially watch the Gazette to see if there’s been any changes in the companies that they’ve invested in question quite naturally, why wouldn’t you?

 

19:43

And the problem can be is that with this so let’s say we’ve got Mr. And Mrs. B. And let’s say that I say Mr. As died and he’s got our best mates and they went to school together and you know, they’ve

 

20:00

They’ve basically, I don’t know, grown up together super, super close this best may absolutely trust Mr. B, Mr. A, with his money. And,

 

20:11

and he’s given him, let’s say 100,000 pounds to kind to the company.

 

20:15

And he sees and I guess that that is friends died. I mean, obviously would assume that he would know that anyway. But you know, let’s just say for this sake that he sees not noticed it in the Gazette, well, he’s a creditor to this company. And he doesn’t know Mrs. B at all. And he doesn’t think the company is going to survive without Mr. A, you might walk into the company say I want my money back.

 

20:38

And that’s potentially obviously an issue because Does the company have 100,000 pounds bear to pay, this guy is also going to have to make sure as well, they’re going to be getting money in from the shareholder obviously, claim. But that’s meant to be going to the family.

 

20:54

So what happens upon a claim was the the claim the company receives the payout. And then what they do is they buy the shares from the family, and they cancel those shares. So when I say when I said early about retaining, this is where I saw that I thought, or somebody in specialist business mode and jargon and everything could really pick me up here. So so this isn’t necessarily about retaining the shares. This is retaining the control and a sense of the company within the shareholders, because we’re just going to repaying the family and we’re just cancelling those shares down. So you know, in a sense of, again, the Mr. And Mrs. B with paid Mr. A’s family, and the value of the shares, Mrs. B shares, then automatically a worth 100% of the company value, she’s not brought those shares back in, she’s not bought them back in. But she’s just got 50% shareholding, but they’re literally the only shares left in the company. So they are 100%.

 

21:45

So we really, really want to be on top of that. The other thing to be very mindful of as well in terms of shareholdings and things like that it would be unusual, but with this kind of arrangement, where we do have to cancel down the shares, and then the existing shareholders share values changes, you can sometimes have it where people, they don’t necessarily want

 

22:06

certain people, certain shareholders maybe don’t want to have like, you know, a set before that magical kind of like 30%, in terms of shareholding where you get controlling function in a company. And that’s the right word controlling function, I’ve been trying to think of it all along, there we go, I’ve got it. Now. Maybe not everybody wants to have, you know, 30% Share or more, maybe some people don’t want certain people in the company to have more than 30%, maybe it’s deliberately meant to be lower. So we need to be very, very mindful of this when we are doing it. Because just make sure that everybody is aware of how it would work. It wouldn’t just be against, say buying and the shares with this one it is we are cancelling them down. And everyone’s chairs just automatically change and kind of grow if somebody does die.

 

22:48

And we need to be very, very conscious as well with this, as I say, it’s going to be going somewhere where the creditors could be seeing it and they could come in and suddenly say we want that money back. Now the company might have surplus cash to be able to pay that back as well. But the last thing we want to do is have the Aniston’s the the shareholders, suddenly the money comes in and we’re maybe having to pay that to a creditor rather than getting those shares back or paying the Fund for the shares. Because we really, really want to make sure that we’re that we’re getting those shares back again, for the reason of you just never know, in terms of next to kin and their power, and their influence on the company, what they’re going to want to doing. And also a lot of families probably wouldn’t want to do that. So something I didn’t mention as well, which I need to get back to quickly for the cost option agreement is with the cross option agreement, either party can enact it. So as they got back to Mr. And Mrs. Been

 

23:43

Mr. Eight dies. Well, let’s say Mrs. B wants to buy the shares, but the family don’t want to buy the cross option agreements. Mrs. B can enact the cross option agreements, arrangements in the family has to sell the shares to her she has to she needs to she’s saying I am buying them you must sell to me that has to happen with the other way. Mr. Hayes died and the Mrs. B’s thinking I don’t want to buy these shares because

 

24:09

the money you know kind of thing, that the family can enact a shareholder agreement across option agreement and say, well, we don’t care what’s going on with the business. You’re paying us the value of these shares. So either party can enact it, neither can say no about it. So just be mindful of all of those things. So cross option agreement, key things premium equalisation, either party can enact it. Premiums offset gains corporation tax by the hour p 11. D company buyback, it’s obviously the company pays for it no corporation tax relief, we do have to make those extra statements if somebody does die into the places where the creditors are potentially going to be seeing them. The shares are cancelled down rather than being a sense bought back. And ideally, we want the shareholder to have been there for three years just because we don’t want to risk any kind of taxation and

 

25:00

Shoes, if they’ve been there for less than that. So to give you an example of how kind of the premium equalisation works, I’m going to take you out give you an example of a shareholder protection policy that was done with six people.

 

25:13

And, obviously with that one, and we did do it on an own life policy, because we weren’t going to live with one another because it was just going to get to a silly, silly amount of policies. And we did it with the cross option agreement rather than a company buyback because of that issue in terms of sorry, the creditors and what they could potentially demand and things like that.

 

25:37

So as an example, so I have one member that was insured for 600,000 pounds of life insurance. And his five year a newborn, child protection is usually five year your 10 year renewable, just because shareholders can change it it just means that it’s Mr. Destress debasement to work, basically. And for this person, the cost of their policy was 24 pounds per month. Now through premium equalisation that meant that the other five shareholders each paid or pound 80 towards that person’s insurance. So

 

26:08

another thing you can find is that somebody might see their premiums on the premium equalisation, and maybe they’re older than the others. Maybe they’ve had some health conditions, maybe they’re doing some kind of risky sports, anything like that. Their premiums are phenomenally higher than the rest. And they can think, well, I don’t want to pay for this out my own money. And I don’t know all this stuff. It’s just really important to remember to just go back and go, but you know, but you’re not paying for actually, the authors are going to be paying for your posting their vocal policies that really, really cheap. So your paints was this, you’re not actually gonna be paying that much because you’re paying the really, for the really low cost people in a sense, and they’re obviously all contributing towards yours, because they’d be the ones that would benefit from it. So if people are feeling a little bit like, oh, that price, you know, I’m not sure about that premium justice. So remember, this. It’s, it does have to be equalised. So it isn’t usually as intense as a lot of people think.

 

27:04

So that is a very, very quick rundown. Thank you for listening, everybody. Next time Mark. Ron is going to be back with me. We’ll be talking about protection insurance and antiphospholipid syndrome. If you’d like to visit our website practical heightened protection dot code at UK, and you can access all our episodes there and you can also get a CPD certificate. Thanks to our sponsors, the optimum hours. Thank you very much for listening, and I will speak to you all soon. Bye