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Understanding….. Shareholder Protection

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Presentation on theme: "Understanding….. Shareholder Protection"— Presentation transcript:

1 Understanding….. Shareholder Protection
Richard Smith / Debra Hale Protection Specialist Zurich Intermediary Group

2 Important information
This presentation is provided to you by Zurich Intermediary Group in your capacity as a financial services industry professional. It must not be made available or copied or otherwise quoted or referred to in whole or in part in any way, including orally, to any person without our express written permission, which we may, at our absolute discretion, grant or withhold or grant subject to conditions, including conditions as to our responsibility. We accept no duty or responsibility, and we disclaim all liability whether in contract, tort (including negligence) in respect of this material but this sentence does not exclude any liability which by law cannot be excluded.

3 Learning agenda To understand how shareholder protection fits within a comprehensive business protection solution To be aware of the market opportunities for writing shareholder protection To know the two main objectives in setting up a scheme To understand the two methods of achieving the objectives To be able to explain the completion of the business trust To be aware of the main elements of an option agreement To understand the importance of Business Property Relief To be able to demonstrate the solution in a clear and logical format

4 Protect the business owners
Key person protection Business liability protection Protect the business owners Shareholder protection Partnership protection Protect the employees Relevant Life Policy

5 Protect the business owners
Key person protection Business liability protection Protect the business owners Shareholder protection Partnership protection Protect the employees Relevant Life Policy

6 Why business protection?
40% of businesses would cease trading within1 year of losing a key person** Over 50% of business owners have no succession plan in place ** In February 2016, there were 3.4 million active registered companies in the UK* 57% of businesses have some form of debt – the average amount being £377k ** Only 28% of business owners had heard of RLP’s ** * (as at February 2016) ** Legal & General Business Protection Research 2015 For intermediary use only - not for use with your clients For intermediary use only - not for use with your clients C:\Documents and Settings\chy5484\Local Settings\Application Data\Office\Macros\Ppt_ci\Templates\Pres_blue_on_white.pot 8

7 Why business protection?
40% of businesses would cease trading within1 year of losing a key person** Over 50% of business owners have no succession plan in place ** In February 2016, there were 3.4 million active registered companies in the UK* 57% of businesses have some form of debt – the average amount being £377k ** Only 28% of business owners had heard of RLP’s ** * (as at February 2016) ** Legal & General Business Protection Research 2015 For intermediary use only - not for use with your clients For intermediary use only - not for use with your clients C:\Documents and Settings\chy5484\Local Settings\Application Data\Office\Macros\Ppt_ci\Templates\Pres_blue_on_white.pot 9

8 Why businesses need to insure….

9 Prospecting - Opportunities where to find business clients
“I don’t have any business clients…” Existing client bank - mortgages, pensions, investments, group risk, general insurance, commercial insurance Professional connections - accountants, solicitors, business consultants New clients - referrals, mailshots / campaigns, seminars C:\Documents and Settings\chy5484\Local Settings\Application Data\Office\Macros\Ppt_ci\Templates\Pres_blue_on_white.pot

10 Protect the business owners
What are we trying to achieve? Who and what are we protecting? Protects the owners Protects the families Protects the business Protects the employees C:\Documents and Settings\chy5484\Local Settings\Application Data\Office\Macros\Ppt_ci\Templates\Pres_blue_on_white.pot

11 Protect the business owners
Different methods to achieve the same objective Company Share Purchase Shares purchased by surviving shareholders C:\Documents and Settings\chy5484\Local Settings\Application Data\Office\Macros\Ppt_ci\Templates\Pres_blue_on_white.pot

12 Protect the business owners
Company share purchase The basics Company enters into an agreement with each shareholder Company effects a life policy or life with earlier critical illness policy on the life of each shareholder Company pays the premiums No tax relief on premiums, benefit tax free On death of shareholder, company has the option to buy the shares and personal representatives have the option to sell the shares On suffering a critical illness, only shareholder has the option to sell the shares Company buys and cancels shares; value of remaining shareholdings increase proportionately C:\Documents and Settings\chy5484\Local Settings\Application Data\Office\Macros\Ppt_ci\Templates\Pres_blue_on_white.pot

13 Protect the business owners
Company share purchase Setting up the scheme Company POLICY LOA on B LOA on A LOA on C Option Agreement for Company Share Purchase on death Option Agreement for Company Share Purchase on critical illness C:\Documents and Settings\chy5484\Local Settings\Application Data\Office\Macros\Ppt_ci\Templates\Pres_blue_on_white.pot C:\Documents and Settings\chy5484\Local Settings\Application Data\Office\Macros\Ppt_ci\Templates\Pres_blue_on_white.pot 15

14 Life of another policies
Protect the business owners Company share purchase How it works in practice A dies Life of another policies on life of A, B & C with company as owner Company COMPANY SHARE PURCHASE AGREEMENT shares Spouse A Claim monies paid to company Company buys and then cancels the shares B & C’S shares increase in value Spouse A has cash Company can force Spouse A to sell the shares, Spouse A can force the company to buy the shares C:\Documents and Settings\chy5484\Local Settings\Application Data\Office\Macros\Ppt_ci\Templates\Pres_blue_on_white.pot

15 Protect the business owners
Shares purchased by surviving shareholders Shareholders enter into an agreement with each other Each shareholder effects a life of another policy on all other shareholders

16 Protect the business owners
Shares purchased by surviving shareholders Policies written life of another A POLICY LOA ON B B POLICY LOA ON A Double Option Agreement Option Agreement for purchase on critical illness C:\Documents and Settings\chy5484\Local Settings\Application Data\Office\Macros\Ppt_ci\Templates\Pres_blue_on_white.pot 18

17 Protect the business owners
Shares purchased by surviving shareholders Policies written life of another A POLICY LOA on B LOA on C B LOA on A C Double Option Agreement Option Agreement for purchase on critical illness C:\Documents and Settings\chy5484\Local Settings\Application Data\Office\Macros\Ppt_ci\Templates\Pres_blue_on_white.pot 19

18 Protect the business owners
Shares purchased by surviving shareholders Shareholders enter into an agreement with each other Each shareholder effects a life of another policy on all other shareholders Each shareholder effects a policy on their own life and writes into trust for the other shareholders

19 Protect the business owners
Shares purchased by surviving shareholders Policies written own life in trust A POLICY IN TRUST Surviving Shareholders B C shareholders Double Option Agreement Option Agreement for purchase on critical illness C:\Documents and Settings\chy5484\Local Settings\Application Data\Office\Macros\Ppt_ci\Templates\Pres_blue_on_white.pot

20 Protect the business owners
Shares purchased by surviving shareholders Shareholders enter into an agreement with each other Each shareholder effects a life of another policy on all other shareholders Each shareholder effects a policy on their own life and writes into trust for the other shareholders On death of shareholder, personal representatives of the deceased have option to sell; surviving shareholders have option to buy On suffering a critical illness, the critically ill shareholder has an option to sell

21 Double Option Agreement
Protect the business owners Shares purchased by the surviving shareholders Double Option Agreement on death How it works in practice A A DIES LIFE POLICY IN TRUST Double Option Agreement SHARES SPOUSE A CLAIM MONIES PAID TO TRUSTEES TRUSTEES PAY CASH TO B & C B & C BUY THE SHARES SPOUSE A HAS CASH SPOUSE A CAN FORCE B & C TO BUY THE SHARES OR B & C CAN FORCE SPOUSE A TO SELL THE SHARES C:\Documents and Settings\chy5484\Local Settings\Application Data\Office\Macros\Ppt_ci\Templates\Pres_blue_on_white.pot

22 Protect the business owners
Shareholder protection The spousal bypass trust For use with Shareholder and Partnership Protection Schemes Share of business is willed to the Trust rather than to the spouse On death, the trust sells the shares to the surviving shareholders and receives the cash Trust can make loans to the spouse which are a debt against the spouse’s estate as they need to be repaid on death Reduces the spouse’s estate on the second death for IHT purposes Taxed under the discretionary trust regime so potential for entry, periodic and exit charges C:\Documents and Settings\chy5484\Local Settings\Application Data\Office\Macros\Ppt_ci\Templates\Pres_blue_on_white.pot

23 A dies Protect the business owners DOUBLE OPTION AGREEMENT
Shareholder protection The spousal bypass trust A dies Life policies in business trust A, B & C DOUBLE OPTION AGREEMENT shares Spousal Bypass Trust Claim monies paid to trustees Trustees pay the cash To B & C B & C buy the shares Spousal Bypass Trust has cash Trustees of SBT can force B & C to buy the shares OR B & C can force trustees to sell the shares C:\Documents and Settings\chy5484\Local Settings\Application Data\Office\Macros\Ppt_ci\Templates\Pres_blue_on_white.pot

24 Protect the business owners
Shareholder protection The flexible business trust For NEW policies only Used for Shareholder / Partnership protection For death and critical illness benefits Ensures the plan proceeds on death or critical illness are paid into trust for the benefit of the beneficiaries Beneficiaries are the surviving shareholders / partners in the business in the same ratio they own the remaining shares Trust caters for changes in shareholders / partners Ensures proceeds are paid to remaining shareholders / partners free of tax Taxed under the discretionary trust regime – entry, periodic and exit charges are possible but unlikely C:\Documents and Settings\chy5484\Local Settings\Application Data\Office\Macros\Ppt_ci\Templates\Pres_blue_on_white.pot

25 Protect the business owners
Shareholder protection The draft double option agreement Used for shareholder and partnership protection Allows personal representatives of the deceased to force surviving shareholders to purchase the shares of the deceased Allows surviving shareholders to force personal representatives of the deceased to sell the shares of the deceased Flexible arrangement which allows for nothing to happen if both parties agree Allows for sale / purchase to take place at specified or market value Retains Business Property Relief where available C:\Documents and Settings\chy5484\Local Settings\Application Data\Office\Macros\Ppt_ci\Templates\Pres_blue_on_white.pot

26 Protect the business owners
Shareholder protection Business property relief Keeps the value of the share outside the estate for IHT purposes Available on “relevant business property” A business or an interest in a business The shares in an unquoted company Relevant business property must be held for at least 2 years There is no BPR if the business is "wholly or mainly" dealing in securities, stocks or shares, land or buildings or in the making or holding of investments There is no BPR if the share of the business is subject to a binding contract of sale

27 Protect the business Case study TDH Ltd Gross profit £800,000
Net profit before tax £150,000 Company value £1m Business loan £400,000 with 5 years remaining Overdraft £120,000 – rolling annual review Directors’ Loan Accounts Tom - £70,000 Dick - £75,000 Harriet - £25,000 Harriet is sales director and responsible for 50% of the gross profit; Tom and Dick are equally responsible for the remainder It is estimated that on death or critical illness, gross profit attributable to the key people would drop by 50% and it would take 1 year to recover Replacement cover for first year at 1 x salary + 20% recruitment costs All business liabilities to be protected Key person, shareholder protection and Death in Service cover required AGE SALARY BONUS DIVIDEND SHARE VALUE TOM 50nb £60,000 £40,000 40% £400,000 DICK 45nb HARRIET 35nb £50,000 £30,000 £20,000 20% £200,000 C:\Documents and Settings\chy5484\Local Settings\Application Data\Office\Macros\Ppt_ci\Templates\Pres_blue_on_white.pot 30

28 Protect the business owners
Case study model answer Setting up the policies NAME SHARE VALUE TOM 40% £400,000 DICK HARRIET 20% £200,000 Policies taken out on own life basis Policies written in trust using Flexible Business Trust Beneficiaries are surviving shareholders Additional trustees are the surviving shareholders Double Option Agreement / Critical Illness Option Company pays the premiums Claim benefits paid to the surviving shareholders C:\Documents and Settings\chy5484\Local Settings\Application Data\Office\Macros\Ppt_ci\Templates\Pres_blue_on_white.pot 31

29 Protect the business owners
Case study model answer Costs and commissions Name Age Share Sum Assured Monthly Premium Life only 5 year renewable Initial Comm 5 year renewable Life / CI Tom 50nb 40% £400,000 £52.44 £560 £343.70 £3674 Dick 45nb £35.54 £379 £211.70 £2263 Harriet 35nb 20% £200,000 £11.57 £123 £44.90 £480 Totals £99.55 £1062 £600.30 £6417 Source: Zurich quotes 24/03/2016 based on 130% x LAUTRO + 10% x LAUTRO for online submission C:\Documents and Settings\chy5484\Local Settings\Application Data\Office\Macros\Ppt_ci\Templates\Pres_blue_on_white.pot 32

30 Payment equalisation

31 Protect the business owners
Payment equalisation HMRC needs to see this as a “commercial transaction” Costs of the scheme need to be fairly apportioned amongst the members Premiums will be different due to: - age - health - smoker status - shareholding

32 Protect the business owners
Payment equalisation Tom owns 40%, premium is £ pa Dick owns 40% premium is £ pa Harriet owns 20% premium is £ pa The surviving shareholders can buy a proportion of the deceased shareholder’s shareholding, based on the ratio of their own shares to the total remaining shares. On Tom’s death: Tom owned 40%, so there is 60% remaining Dick can buy 40/60 of Tom’s shares and Harriet can buy 20/60 So, Dick pays 40/60 of Tom’s premium and Harriet pays 20/60 Follow the same process for all shareholders

33 Protect the business owners
Payment equalisation Tom pays (40/60 x £ ) + (40/80 x £546.00) = £ Dick pays (40/60 x £ ) + (40/80 x £546.00) = £ Harriet pays (20/60 x £ ) + (20/60 x £ ) = £ Business Protection Adviser Tool has an equalisation calculator

34 Claim benefits paid tax free via the Flexible Business trust
Protect the business owners Tax treatment of premiums and benefits The company pays the premiums and claims corporation tax relief Equalise the premiums Equalised premiums treated as additional income Subject to income tax and ER/EE NIC Claim benefits paid tax free via the Flexible Business trust

35 Protect the business owners
Be careful Check first Articles of Association and Memorandum Shareholder agreement Partnership agreement

36 Protect the business owners
Valuing the business Accountant’s valuation Price earnings ratio Net asset value Net profit method Net profit before tax, averaged over three years, x 7 C:\Documents and Settings\chy5484\Local Settings\Application Data\Office\Macros\Ppt_ci\Templates\Pres_blue_on_white.pot

37 Factfinding - focused factfind
Hard facts Owners Key People Profit Soft facts Business Plans SWOT analysis C:\Documents and Settings\chy5484\Local Settings\Application Data\Office\Macros\Ppt_ci\Templates\Pres_blue_on_white.pot

38 Factfinding - key person checklist

39 Factfinding - shareholder protection checklist

40 Support material available
C:\Documents and Settings\chy5484\Local Settings\Application Data\Office\Macros\Ppt_ci\Templates\Pres_blue_on_white.pot

41 The Business Protection Adviser Tool
Download from: Logical and structured method to demonstrate business protection solutions Create a needs summary Calculate sums assured Produce a client report or use as an audit trail for your records Comprehensive literature library

42 Underwriting Competitive medical underwriting limits
No financial underwriting below £2m life / £800k CI per person No aggregation of sums assured No questions about other provider decisions Own Doctor medicals Large Case Team Underwriting helpline Critical Illness - up to £5m in total for personal and business C:\Documents and Settings\chy5484\Local Settings\Application Data\Office\Macros\Ppt_ci\Templates\Pres_blue_on_white.pot 45

43 Learning outcomes To understand how shareholder protection fits within a comprehensive business protection solution To be aware of the market opportunities for writing shareholder protection To know the two main objectives in setting up a scheme To understand the two methods of achieving the objectives To be able to explain the completion of the business trust To be aware of the main elements of an option agreement To understand the importance of Business Property Relief To be able to demonstrate the solution in a clear and logical format

44 Important information
Thank you for listening Important information Any tax and legislation information is based on Zurich’s current understanding and may change in the future . Life assurance and pensions are provided by Zurich Assurance Ltd. Registered in England and Wales under company number Registered Office: The Grange, Bishops Cleeve, Cheltenham, GL52 8XX. Zurich Intermediary Group Limited. Registered in England and Wales under company number Registered Office: The Grange, Bishops Cleeve, Cheltenham, GL52 8XX. Telephone no We may monitor or record calls to improve service. For use by professional financial advisers only. No other person should rely on, or act on any information in this advertisement when making an investment decision. This advertisement has not been approved for use with clients. 47


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