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
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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
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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
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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
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11. Protect the business owners
Different methods to achieve the same objective
Company Share Purchase
Shares purchased by surviving shareholders
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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37. Factfinding - focused factfind
Hard facts
Owners
Key People
Profit
Soft facts
Business Plans
SWOT analysis
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38. Factfinding - key person checklist

39. Factfinding - shareholder protection checklist

40. Support material available
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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
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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