Protection for your corporate clients For financial advisers only investments pensions PROTECTION We ll help you get there
contents introduction 4 Key employee cover 5 Who needs it, and why? 5 Who does it cover? 5 Who is a key employee? 6 Calculating the cover 7 Which method should you use? 7 Apportionment method 7 Salary method 8 Loss of profits method 8 Payroll method 8 Applying for key employee life cover through Protect 9 Who completes which part of the application form? 9 Policies within a plan 9 The information we may ask for 10 Financial underwriting limits 10 Medical underwriting limits 10 Loan cover 12 Why you might need loan cover 12 Who is covered companies 12 How to set up loan cover with Old Mutual Wealth 13 How to apply for loan cover 13 Retaining the business 13 Assigning a policy to a key person 13 Key person or loan cover for partnerships 14 The different sorts of partnerships 14 This communication is designed for and directed at professional financial advisers. No other person should rely upon the information contained within this communication. 2
Partnership and shareholder protection 15 Who needs it? 15 Why? 15 What cover is needed? 15 Who does it cover? 15 Setting up the agreement 16 Double option agreement 16 Single option agreement 16 Automatic accrual agreements 17 Company share purchase 17 Ways to set up the insurance 18 Life of another arrangement 18 How to apply for life of another cover 18 Writing the plan in trust 19 Pre-owned asset tax 19 Trusts and inheritance tax 19 How to apply for partnership or shareholder cover written in trust 20 Equalising premiums 20 Assigning the policy 20 Taxation 22 Key employee or loan cover 22 Partnership or shareholder protection 23 Sample letters to HM Revenue & Customs 24 The Old Mutual Wealth products 26 Protect 26 Immediate cover with Protect 27 How can we help you? 30 Contact us 30 Our website 30 The literature you might need 30 Further information 31 3
introduction Insurance cover can be important to a business s survival. Yet too many businesses forget to insure their most valuable asset their people whether they are key employees, partners or shareholders. At Old Mutual Wealth we have been providing business protection for many years and have built a reputation for our technical knowledge and support. This guide gives both practical and technical information about ensuring that your business clients are fully protected. If you are new to this market you should also read Getting started in business protection, which covers many of the basics. Definitions For simplicity, we have used these terms throughout this guide: Key employee Any key person for whom the business needs insurance cover, including directors. Business A business of any type, including partnerships, limited companies and sole traders. 4
Key employee cover Any business could suffer if a director or key employee died or became ill. As well as the day-today problems, the absence of a key person can have a serious effect on the company s finances. Who needs it, and why? Only a small percentage of all UK firms who should have this cover have taken any action to protect themselves. It is still an untapped market. Yet many companies should have this cover to protect against a loss of earnings or profits, and against the costs of replacing a key employee. Sole traders are as vulnerable as larger companies, as illness or death might cause their business to close. This could give rise to large redundancy payments, for which their family would be responsible. You and your clients can find more information about redundancy at www.gov.uk/staff-redundant This section explains how to identify key employees and how to calculate the cover needed. Before setting up key person cover, a company should record its intentions in the minutes of a board meeting. A partnership should do the same in a Partner s Resolution. Who does it cover? The company takes out a protection plan on the life of the key employees. The company is the policyholder. The key employees are the lives assured. The business receives the proceeds of any claim. The plan is set up on the most suitable basis for the business s particular needs on either a fixed or rolling term basis. In some cases, say for an owner of the business, a whole life policy might be used. For those who want the benefit of guaranteed insurability and cover that has premiums fixed for ten years at a time, Protect offers a rolling term as a useful alternative to term assurance with a fixed end date and whole life. You can find out more about rolling term in the Protect adviser guide About Protect. See Taxation on page 22 for more information on the tax treatment of different types of plan. Policyholder Life assured How does the cover work? The company* The key employee The company takes out cover on the life of one or more key employees. It can assign the insurance to a bank to guarantee a loan or overdraft if necessary. * For information about how cover should be set up for partnerships, see page 14. 5
Key employee cover (Continued) Who is a key employee? Deciding who is a key employee can be subjective, and varies widely between companies. The main point to consider is whether the business s turnover and profitability would be affected if that person were absent because of serious illness or death. Although most of the key employees insured with Old Mutual Wealth are directors, key employees could include a top salesperson, a skilled technician or the leader of an essential project. Here are some actual examples of cover that we have provided for key employees: Key employee s role Company s business Sum assured Football club manager Football 250,000 Managing director Events organisation 1.5 million Managing director Agricultural feed supplier 436,000 Director Catering supplies 1 million 6
Calculating the cover Working out the sum assured needed for each key employee is not an exact science. When you are working out how much cover to have, you should consider: the potential loss of profits the potential loss of business contacts and goodwill a reduction in turnover the possible loss of confidence in the business by its bank or other investors, who could then withdraw their financial support or recall loans a possible problem with the business s suppliers, who might withdraw credit or tighten their terms of trading the knowledge and expertise which will no longer be available to the business, even for the time while the key employee is ill the effect on potential investment, such as a management buy-out, expansion plans and industrial relations the cost of recruiting and training a replacement, and the time it may take to do this different levels of life cover and critical illness cover, if the death or critical illness of the key employee would affect the business differently. You need to assess how long it would take the business to recover, and the costs that the business would have to bear during such a recovery. Which method should you use? There are several different methods to use when calculating cover and we have shown these on page 8. However, where the sum assured is linked to a loan, the cover for each person is usually equal to the amount borrowed (see Loan cover on page 12). 1. Apportionment method This uses an average of the last three years pre-tax profits, less any exceptional or extraordinary items. Normally, someone inside the company will be able to allocate the profits between the key personnel, based on their individual contribution to the business. The advantage of this method is that it can be simple, and related to the company s profits. However, the disadvantage is that it uses a subjective assessment of the key employee s contribution to the company s profits. 7
Calculating the cover (Continued) 2. Salary method This method uses a straight multiple of the key person s full salary package, including their pension, company car and any other benefits in kind. This method can be simple to work out and understand but does not take loss of profits into account. Example Total salary package Chosen multiple 50,000 a year the normal multiples are: up to 10 for life cover up to 5 for critical illness cover So the cover needed is 50,000 x 10 = 500,000 (or 50,000 x 5 = 250,000) 3. Loss of profits method This method uses a straight multiple of the business s profits. This can be based on either the net or gross profits. It is simple, but does not take fixed costs into account. 4. Payroll method The total salary package is divided by the business s total payroll, multiplied by the yearly gross profit and the number of years the business believes it will take to recover from the loss of the key employee. It can reflect the true situation more accurately, but the key employee s total salary package must be shown to be reasonable within the marketplace. Often we don t need any further financial information than that on the application form. However, for sums assured above 600,000 we will need more information before we can underwrite the case. You can find more about this on page 10. In certain cases, for high sums assured, we may require additional medical evidence. You can find details of when we may need this on page 11. Example Total salary package Total payroll Gross profit 50,000 a year 2 million a year 10 million a year Number of years to replace key employee 3 years So the cover needed is 50,000 x 3 x 10,000,000 =750,000 2,000,000 8
Applying for key employee life cover through Protect Both the business and the key employee need to complete parts of the application. These tables show who has to complete which parts. The business (the company director or an authorised signatory) completes Each key employee completes Both the business and the key employee complete policy and policyholder the direct debit instruction health information tele interview the declaration and application If a company director is to be the key employee, they may prefer to have a different signatory on behalf of the business to show that it was the company s decision to have the cover, not a personal one. If a sole trader wishes to have key person cover on their own life, it should be written as an own life policy in trust for their family. Policies within a plan for ease of administration, you can write all of a company s Protect key employee policies in a single plan and complete just one direct debit instruction. if the company is applying for more than two key employees using a paper application, please use our form Applying for additional Protect policies and ask us on the front of the application form to put all the policies in one plan. if the key employees do not wish to share their medical information, they can complete separate application forms and send them to us in a sealed envelope addressed to the Chief Medical Officer at our Head Office. We will still treat them all as policies within one plan, as long as each form is sent with a note stating that it is to be one of the policies within a specified plan. 9
The information we may ask for The business must be able to justify the level of cover they want for each key employee. Financial underwriting limits The table below shows the limits above which we will always need financial evidence. For example, for key employee cover we may need information to show how the sum assured asked for matches the key employees worth to the business. These limits are the aggregate of the total cover for the life assured, including policies from other providers. Types of evidence For sums assured above Financial questionnaire completed by you and the client Life cover 1.5 million Critical illness cover 800,000 Independent financial evidence 2.0 million 1.5 million The independent information we might require includes: a business plan including profit and loss projections the company s Report and Accounts for the last three years if the policy is for loan protection, a copy of the loan agreement if the company has no track record, we may ask for a copy of the key employees curriculum vitae. Medical underwriting limits We may need additional medical information depending on the age of the life assured and the amount of cover. This includes cover from any other Old Mutual Wealth life policies. You can find details of these on the opposite page. 10
Life Cover Medical underwriting for single and joint life first death policies Level of cover up to 30 31-40 41-45 46-50 51-55 56-60 61-65 66+ 0-50,000 50,001-100,000 NSE 100,001-150,000 NSE NSE 150,001-200,000 NSE NSE 200,001-250,000 NSE NSE NSE 250,001-300,000 NSE NSE NSE NSE & FBP 300,001-400,000 NSE NSE NSE NSE & FBP 400,001-500,000 NSE NSE NSE NSE & FBP MED & FBP 500,001-600,000 NSE NSE NSE NSE NSE & FBP MED & FBP 600,001-750,000 NSE NSE NSE NSE NSE MED & FBP MED & FBP 750,001-1 million NSE NSE NSE NSE NSE NSE MED & FBP 1-1.5 million NSE NSE NSE NSE MED & FBP MED & FBP 1.5-2 million NSE NSE MED & FBP MED & FBP MED & FBP MED & FBP 2-2.5 million NSE & FBP MED & FBP MED & FBP MED & FBP 2.5-3 million MED & FBP MED & FBP MED & FBP MED & FBP 3-3.5 million MED & FBP MED & FBP MED & FBP MED & FBP 3.5-5 million MED & FBP MED & FBP MED & FBP MED & FBP Over 5 million Refer to underwriting Refer to underwriting Refer to underwriting Refer to underwriting MED, FBP & Ex MED, FBP & Ex MED, FBP (incl. PSA) & Ex MED, FBP (incl. PSA) & Ex Refer to underwriting MED, FBP & Ex MED, FBP & Ex MED, FBP (incl. PSA) & Ex MED, FBP (incl. PSA) & Ex Refer to underwriting NSE Nurse screening MED Doctor medical examination FBP Full blood profile PSA Prostate specific antigen (males only) Ex Exercise Non-smokers of all ages will require a cotinine test whenever a NSE or MED is required. MED, FBP & Ex MED, FBP & Ex MED, FBP (incl. PSA) & Ex MED, FBP (incl. PSA) & Ex MED, FBP (incl. PSA) & Ex MED, FBP (incl. PSA) & Ex Refer to underwriting MED, FBP & Ex MED, FBP & Ex MED, FBP (incl. PSA) & Ex MED, FBP (incl. PSA) & Ex MED, FBP (incl. PSA) & Ex MED, FBP (incl. PSA) & Ex MED, FBP (incl. PSA) & Ex Refer to underwriting HIV testing limits for single and joint life first death policies 1 million All lives 18-60 HIV testing limits for joint life last death policies Financial underwriting for all policies 1.5 million Financial Questionnaire 2 million Independent Financial Evidence 1.5 million All lives 18-60 Critical Illness Cover Sum Assured ( ) Ages up to 30 31-40 41-45 46-50 51-55 56-60 61-67 0-50,000 50,001-100,000 NSE 100,001-125,000 NSE NSE 125,001-150,000 NSE NSE NSE 150,001-200,000 NSE NSE MED, FBP & PSA 200,001-250,000 NSE NSE MED, FBP & PSA 250,001-300,000 NSE NSE & FBP NSE, FBP & PSA MED, FBP & PSA 300,001-320,000 NSE NSE NSE & FBP NSE, FBP & PSA MED, FBP & PSA 320,001-400,000 NSE NSE NSE & FBP NSE, FBP & PSA MED, FBP & PSA 400,001-450,000 NSE NSE & FBP NSE & FBP NSE & FBP NSE, FBP & PSA MED, FBP & PSA 450,001-500,000 NSE NSE & FBP NSE & FBP NSE & FBP NSE, FBP & PSA 500,001-600,000 NSE NSE NSE & FBP NSE & FBP NSE, FBP & PSA MED, FBP & PSA 600,001-700,000 NSE NSE & FBP NSE & FBP NSE & FBP MED, FBP & PSA 700,001-750,000 NSE & FBP NSE & FBP NSE & FBP NSE & FBP MED, FBP & PSA 750,001-1,000,000 NSE & FBP NSE & FBP MED & FBP MED & FBP 1,000,001-1,500,000 MED & FBP MED & FBP MED & FBP MED, FBP & Ex 1,500,001-2,000,000 MED & FBP MED & FBP MED & FBP MED, FBP & Ex 2,000,001-2,500,000 MED & FBP MED & FBP MED & FBP MED, FBP & Ex 2,500,001-3,000,000 MED & FBP MED & FBP MED & FBP MED, FBP & Ex Over 3,000,000 Refer Underwriting Refer Underwriting Refer Underwriting Refer Underwriting Refer Underwriting Refer Underwriting Refer Underwriting NSE Nurse screening MED Doctor medical examination FBP Full blood profile PSA Prostate specific antigen (males only) Ex Exercise Non-smokers of all ages will require a cotinine test whenever a NSE or MED is required. HIV testing limits Financial underwriting limits Over 1 million All lives Over 800,000 Financial Questionnaire Over 1.5 million Independent Financial Evidence 11
loan cover A lender often makes it a condition of the loan that some of the directors and key employees have insurance cover. In fact, the lender may not advance the money until the cover is in place. Why you might need loan cover As well as loans from recognised lenders, a business may have a loan from one or more of its directors. This might be an actual unsecured loan, or the directors may leave some or all of their salary, bonus or dividends with the business in the form of a loan. Directors often act as guarantors of loans to the business from lenders, and may be personally liable if the business defaults on the loan, or the lender calls it in. Who is covered companies The company is usually the policyholder, and the key employee is the life assured. If the employee dies or has one of the named critical illnesses, the company receives a cash sum to pay off the outstanding loan. Policyholder The company Life assured The key employee How does the cover The company takes out cover on the life of one or more key employees. The company can assign the insurance, for example, to a bank to guarantee a loan or overdraft if necessary. Unless the lender specifies the type of cover and term, the company can choose the best combination to meet its particular needs. Cover can be for life only or combined critical illness and life cover. The policy should run for the duration of the loan. For partnerships, please see page 14. 12
How to set up loan cover with Old Mutual Wealth When setting up loan cover, you will need to consider: Should the policy include life or critical illness cover, or a combination? How much cover is needed now? Will this increase in the future? How will the loan be repaid, and over what period? Have any directors or partners given personal guarantees for the loan? Whose death might affect repayment of the loan? Does your client need an immediate cover facility to avoid delays in receiving the advance? See page 27 for more details. How to apply for loan cover Setting up the cover for a loan follows the same process as setting up key employee cover. See page 9 for full details. We normally only need to see a copy of the loan agreement if the sum assured is over 1.25 million. Simplified acceptance We have reduced the documents we need for many business loans to the minimum. Provided that the cover meets the criteria below, all we need with the application is evidence from the lender that the applicant has taken out a business loan. the sum assured is no higher than 2.5 million. the amount of cover must be the same as or less than the loan amount. the loan is from an approved UK lender. You can find full details of this facility in our leaflet Old Mutual Wealth for quick and easy loan protection cover. Retaining the business When your clients apply for a business loan, the lender may offer them insurance cover as part of the loan arrangement. For example, the lender may point out that it can offer immediate cover so the loan will not be delayed. The potential disadvantage of this is that your client may not get the most suitable product, as some lenders do not consider the full range of plans available when recommending protection cover. We offer an immediate cover facility with Protect, which can help you keep this business. This offers your clients flexible cover, tailored to meet their needs and no delays in completing their loan. And if they need to increase their loan in the future, it is simple to increase their cover later, too. See page 27 for more details. Our cover is flexible enough to adapt to your client s changing needs in the future. For example, most of the Old Mutual Wealth protection policies include a guaranteed insurability option for extra cover if a company s loan increases. If the company reduces the loan, you can also reduce the cover accordingly. Assigning a policy to a key person When a key person leaves the company or retires, it is possible to assign the policy to them, so the cover can continue for their personal benefit. This is done using a Deed of Assignment. You can find more information about assigning policies on www.informerdigital.com 13
Key person or loan cover for partnerships The different sorts of partnerships A partnership may have any number of partners, and is defined as the relationship that exists between persons carrying on business in common with a view of profit. The difference between unlimited and limited liability is shown below. Usually an existing partnership has unlimited liability, except in Scotland. However, the Limited Liability Partnerships Act 2000 allows new partnerships to be able to choose to have some form of limited liability if the partners prefer. Partnership Act 1890 Before 2000, the rules governing partnerships were: All partners have joint and several liability. They may be forced to use their personal assets to settle a liability incurred by a fellow partner. under certain conditions, some partners could have limited liability, but at least one partner in any partnership must have unlimited liability. Unless otherwise written into the partnership agreement: the partnership is dissolved on the death of any of the partners each partner is entitled to his or her share of the partnership and profits on retirement. in England, Wales and Northern Ireland, a partnership is not a legal entity and cannot enter into a contract, for example for insurance cover. In Scotland, partnerships are legal entities in their own right. For this sort of partnership, each partner has an own life plan, written in trust for the benefit of the other partners, as described on page 21. The partners should consult their legal adviser to put in place an agreement that any benefits paid on claim will be used for the partnership. No tax relief is available on the premiums paid for key person cover, as the life assured is a partner rather than an employee see Taxation on page 22. Limited Liability Partnerships Act 2000 This is a half-way house between the old partnership status and limited company status. Its features are: it is a separate legal entity which is able to enter into contracts and hold property. it operates under different taxation rules from partnerships with unlimited liability. It must publish its accounts. It is supervised by a regulatory body. Old-style partnerships without limited liability are still available. This sort of partnership can take out cover as the policyholder. Each individual partner is then a separate life assured under a policy within the plan. 14
Partnership and shareholder protection The protection needs of partners and shareholders are broadly similar to enable them to buy out the share of a business colleague who has died or become too ill to carry on working. Who needs it? This protection is for: the partners in a business partnership of any size the shareholders of a private limited company. For the sake of simplicity we will call partners and shareholders the business owners. Why? On the death or illness of a business owner it is important that those who remain keep control of the business. Partnership or shareholder protection can help by enabling the business owners to continue trading. It also avoids the added financial problems of raising capital to buy out a business owner who is critically ill, or the heirs of a business owner who has died. Problems can arise when someone without experience or any interest in running the business inherits a share. The remaining business owners may need to buy that share to keep control of the business. Losing a key member of the business can lead to problems with lenders and suppliers when the business is already suffering the loss of an important team member. Having the right insurance means the remaining business owners can choose to buy out the interest of a critically ill business owner. This also ensures that the business owner s family receives the full value of their interest in the business on death. If a company s Articles of Association include a pre-emption clause, the remaining shareholders have an automatic right to buy the shares of a partner who dies or leaves due to illness. If a partnership has not drawn up a partnership agreement, under current law the partnership will end on the death of any of the partners. What cover is needed? The amount of cover will reflect the value of each owner s share in the business. This is a proportion of: the capital value of the business, plus the goodwill included in the accounts, plus any undistributed profits, plus the individual s loan or partnership account. The value of the business should normally be assessed professionally, and our underwriters may ask to see a copy of the valuation. The value of each share should be reviewed regularly to ensure that the cover remains adequate. Who does it cover? Each individual business owner takes out a separate plan, either on a life of another basis or written under a business assurance trust. See page 20 to find out more about how policies can be written in trust. The policy can have a fixed or rolling term, depending on the business owner s specific needs. This example shows how four partners could use Protect to insure their shares in the business: Policy 1 John Poole 300,000 Each partner chooses life cover with a rolling term and writes the policy under trust for the other partners. Policy 2 David Adams 250,000 Policy 3 Susie Harris 250,000 Policy 4 Jim Taylor 200,000 15
Partnership and shareholder protection (Continued) Setting up the agreement Whichever way your clients choose to set up the plans, they will need some form of agreement to identify how they will use the funds after a claim. This agreement must be consistent with a company s Articles of Association, or in the case of a partnership with their Partnership Agreement. You can get sample agreements from our website: www.oldmutualwealth.co.uk/ Adviser/products/protection/ Business-protection/ A buy and sell agreement is a binding contract for the shareholder or partner s family to sell their share, and for the remaining partners or shareholders to buy it. If such an agreement is used, business property relief will be lost, as HM Revenue & Customs (HMRC) will consider it to be a contract for sale. A single or double option agreement should be used instead. 1. Double option agreement The surviving business owners have the option to buy the share of their ill or dead colleague within six months of the event. The agreement requires the person insured (or their beneficiaries or their legal personal representatives) to sell their share of the business to the other business owners if asked to do so. Similarly, the agreement requires the other business owners to buy out the shares of the person insured if asked to do so by them (or their beneficiaries or legal personal representatives). The remaining business owners use the proceeds of the insurance policy to buy the share. It is not a binding contract for sale so there is no danger of losing inheritance tax (IHT) business property relief, where it applies. (Some types of trade are not eligible for IHT business property relief.) If new owners join the business and need this protection, they must complete a new cross option agreement. 2. Single option agreement A single option agreement covers critical illness and permanent disability claims. Under this agreement, the critically ill or disabled partner or shareholder can ask the remaining business owners to buy the share if they wish, but the remaining owners cannot insist on the sale. This option can be combined with a double option agreement covering the life insurance on the partner or shareholder. This means you do not need to use a separate form unless you only want the single option agreement. Like the double option agreement it is not a binding contract for sale, so there is no danger of losing IHT business property relief. It is essential that legal advice is sought before the business partners or shareholders enter into a cross option agreement. 16
3. Automatic accrual agreements Some partnership agreements include a clause that each partner s share will automatically pass to the other partners on death. This applies particularly in specialist vocation partnerships such as solicitors or dentists, where an interest in the business can only belong to a suitably qualified individual. Therefore, leaving it to a member of the family may not be possible. To make sure the deceased partner s family receives payment for the share, each partner has a policy written in trust for their own family to cover the value of their share of the partnership. Under an automatic accrual agreement, for inheritance tax purposes the estate of the dead business owner is considered to receive the value of the share in cash rather than shares. This can lead to a tax liability. The partners should consult their legal adviser to have an automatic accrual agreement drawn up. The agreement requires each partner to maintain the insurance to cover the full value of their share of the partnership. If the partner leaves the partnership, the plan can continue for their family s benefit. 4. Company share purchase This is a complex area, and clients should seek professional advice on it. Share purchase must be allowed for in a company s Articles of Association. If the shares are quoted on a stock exchange or the alternative investments market, the purchase must be approved by the shareholders. The company can use life or critical illness insurance to provide funds to buy the shares. The policy normally lasts until the expected retirement date of the life assured, and no trust is needed as the company receives the benefits on claim. You can find more information on www.informerdigital.com 17
Ways to set up the insurance There are two ways you might set up the plans for partnership or shareholder protection. 1. Life of another arrangement This is a simple arrangement, which is suitable for a few policyholders. Each business owner has a policy on their own life, taken out by the other owners. They do this by applying for insurance on each of the other owners, with the insurable interest being the interest in the business (see diagram below). It is appropriate when there are no more than three partners or shareholders. How to apply for life of another cover For two owners: each person takes out cover on the life of the other the policies are not written in trust a cross-option agreement should be put in place. For three owners: each policy has two policyholders, with the third owner as the life assured the policies are not written in trust a cross-option agreement should be put in place. Policy A Life assured = Partner A Partner A is a policyholder of Policy B and Policy C Policy B Life assured = Partner B Partner B is a policyholder of Policy A and Policy C Policy C Life assured = Partner C Partner C is a policyholder of Policy A and Policy B 18
2. Writing the plan in trust Each business owner takes out a policy on their own life and, at the same time, writes it under trust for the benefit of the other business owners. Old Mutual Wealth offers a business assurance trust under which the settlor is excluded from benefitting. It is a discretionary trust so the trustees have the power to alter the beneficiaries should the business change in the future. Where the settlor is excluded as a potential beneficiary of the trust, there is no potential for pre-owned asset tax (POAT), but the policy cannot be assigned back to the settlor at a later date. The trust should always exclude the settlor s family members from the beneficiaries, unless they are also partners or shareholders in the business. The life assured is usually appointed as a trustee, and should have at least another trustee to ensure prompt payment of the proceeds. Written agreements set out all the parties rights when they make a claim on the policy. If any of the business owners other than those with a very small shareholding do not take out a policy, you should seek legal advice. You can find copies of our trust forms on www.oldmutualwealth.co.uk/ Adviser/resource-library/ Literature-Library/ Pre-owned asset tax Pre-owned asset tax creates a potential yearly liability to income tax. This only applies if the settlor is included as a potential beneficiary of the trust and the tax is assessed yearly on the potential benefit, even if nothing is received. The potential is far lower for term assurance plans with no surrender value. The tax due is assessed using an official rate of interest on the market value of the potential benefit. This may increase if the settlor is in poor health. If the tax due is less than 5,000, no tax will be payable. Trusts and inheritance tax Discretionary trusts are potentially liable to inheritance tax charges on entry, every ten years, and on exit. Partnership or shareholder cover will not be subject to an entry charge because it is generally a commercial arrangement and so no gift has been made. You and your clients must select the most appropriate trust for their needs: Discretionary business trust has flexibility to cope with changes in partners or shareholders, and in their relative shareholding potential periodic and exit charges. Absolute trust no flexibility to allow for future changes in the business no potential for IHT charges. 19
Ways to set up the insurance (Continued) How to apply for partnership or shareholder cover written in trust Each business owner should normally: complete a separate application (all sections) and a separate direct debit instruction complete a separate business assurance trust complete a separate deed of appointment of more trustees (with the other partners or shareholders). Although we do not need to have these on record, to complete the arrangement the business owners should: get a professional valuation of the business complete a cross option agreement equalise the costs. Equalising premiums Most partnerships will include partners of different ages and states of health, who need different levels of cover. So some partners will pay more for their cover, but will potentially receive less benefit from the arrangement, as they are likely to make the first claim. If the premiums are not equalised between the partners, HMRC will not view it as a commercial arrangement and there may be an IHT liability. This is because without equalisation HMRC may consider the policies to be gifts (transfers of value), and this could lead to tax liability as the gifts favour the younger business owners or those with a smaller stake in the business. Possible ways to ensure this does not happen are: do nothing if the differences between the premiums paid are small increase the business owner s drawings to compensate for the inequality. However, there may be tax and National Insurance implications in doing this equalise the premiums paid by the partners or shareholders. The principles are the same for both partnerships and limited companies. You can find an example on the opposite page. Assigning the policy Because it can be difficult to obtain insurance near retirement age, the settlor may wish to have a policy which can last throughout their life. When they retire or leave the company, the trustees can assign it back to them to continue for their personal use. If they have not already been doing so, they will take over payment of the premiums. This can only be done if the settlor is included in the trust, which may leave them liable to pre-owned asset tax. However, the benefits of having cover after they retire might outweigh this disadvantage for them. Such an assignment of shareholder or partnership cover written on an own life basis under trust does not give rise to a chargeable event, and no tax will be payable. 20
Example Lunar Landscapes has three partners, and its current value is 200,000. Jim started the business and holds a 60% share. Abby and Neil joined him, and each has a 20% share. Jim s share Abby s share if Jim dies: neil and Abby will each be able to buy half of his share (30% each) of the business. So each is entitled to: Jim 75% of 40,000 if Abby dies, plus 75% of 40,000 if Neil dies. Abby 50% of 120,000 if Jim dies, plus 25% of 40,000 if Neil dies. Neil 50% of 120,000 if Jim dies, plus 25% of 40,000 if Abby dies. Jim is now 54, Abby is 28 and Neil is 42. They choose Protect with a rolling term so their cover can last as long as they wish. Their premiums are: Jim 1,995 a year Abby 122 a year Neil 281 a year If Abby dies: Jim can buy 60/80ths (3/4) of her share Neil can buy 20/80ths (1/4) of it. Neil s share if Neil dies: Jim can buy 60/80ths (3/4) of his share Abby can buy 20/80ths (1/4) of his share. Total cost of cover: 2,398 To equalise the premiums: Jim pays Abby pays Neil pays Total Jim s premiums Abby s premiums Neil s premiums Abby and Neil pay 50% each Jim pays 75% and Neil pays 25% Jim pays 75% and Abby pays 25% 0.00 997.50 997.50 1,995.00 91.50 0.00 30.50 122.00 210.75 70.25 0.00 281.00 Total 302.25 1,067.75 1,028.00 2,398.00 21
taxation Key employee or loan cover Type of policy chosen Product Premiums Policy benefits paid on claim For a fixed term of five years and to replace lost profits only. The life assured must be an employee only and have no other relationship with the policyholder. Protect (five-year fixed term only) Normally taxdeductible as a business expense. Benefits are normally taxed as a trading receipt for corporation tax. Alternatively, the sum assured can be grossed up to give the sum needed after tax. In all other cases. Protect (fixed term and rolling term) Normally not tax deductible. We normally pay all benefits free from corporation tax. Cover on key employees is not usually classified as a business expense, so no tax relief is available. The exception to this is a policy for a fixed term of five years to replace loss of profits only, and where the key person s relationship with the business is employee:employer. If these conditions are not met, no tax relief is allowed on the premiums, the sum assured is normally not a trading receipt, and is not subject to corporation tax. Tax relief on premiums is not available if the life assured s share of the business is more than 5%. If the benefits are used to offset the cost of replacing the life assured or lost profits, they may be taxable. In February 2008, the Government brought life assurance policies with a potential surrender value which are company-owned under the loan relationship rules. This means that any increase in value of such policies in excess of the premiums paid will be subject to corporation tax each year. However, a Protect policy can never result in a chargeable gain, as there is no surrender value. (See page 26 for more details about Protect.) 22
Partnership or shareholder protection Premiums Paid from net income and not taxdeductible. Even if the business pays them on the business owner s behalf, the owner will be taxed as if he or she had paid them. Policy benefits paid on claim All benefits normally paid free from income and capital gains tax. Even if the business pays the premiums they are treated as drawings or directors remuneration and the business owner will be taxed as if he or she had paid them. The premiums are not classed as a business expense. Provided the plans are written in trust for the other partners or shareholders and suitable cost sharing arrangements have been made, there will be no IHT implications. See the sections Setting up the agreement and Ways to set up the insurance on pages 16 and 18. Care should be taken if the partners or shareholders are related. Only family members who are partners or shareholders should be included as possible beneficiaries of the trust. There is no tax liability on the proceeds of the plan for the business, as the proceeds do not belong to it. 23
Sample letters to HM Revenue & Customs For key employee cover for a five-year term, only to replace lost profits Dear Sir or Madam Ref: [insert name of company and tax reference] The company above has taken out Protect, a life insurance policy, on the life of a key employee [insert x s name]. Reason for the insurance [x] is a key employee for the company. He/She holds the position of [insert role] and does not own any shares in [insert company name]. If [x] were to die [, or become disabled and unable to work,] the company would suffer financially. As a result, the company has insured the loss of profit resulting from the loss of [x] s services to the company. Insurance details Protect will pay out if [x] dies [, or becomes totally and permanently disabled]. The term of the policy is [five] years. It has no surrender value. The sum assured is aaa,aaa. The premiums are bbb.bb, payable [monthly/yearly] during the term. Please confirm the premiums are allowable expenses for corporation tax and therefore tax deductible. Yours faithfully On behalf of [insert company name] 24
For all other cases, such as terms of ten years or more or for loan protection Dear Sir or Madam Ref: [insert name of company and tax reference] The company above has taken out Protect, a life insurance policy, on the life of a key employee, [insert x s name]. Reason for the insurance [x] is a key employee for the company and holds the position of [insert role]. If [x] were to die [, or become disabled and unable to work,] the company would suffer financially. As a result, the company has taken out this insurance so that the sum assured can be used to: provide a cash sum to repay the company s loan of aaa,aaa insure the loss of profit resulting from the loss of [x] s services to the company provide funds for the recruitment and training of a successor for [x]. Insurance details Protect will pay out if [x] dies [, or becomes totally and permanently disabled,] during the term. It has no surrender value. The sum assured is aaa,aaa. The premiums are bbb.bb, payable [monthly/yearly] during the term of [y] years. Please confirm the premiums are not allowable expenses for corporation tax and therefore not tax deductible. Yours faithfully On behalf of [insert company name] The sample letters above give guidance on the issues that HMRC will require information on in order to determine eligibility for tax relief. We can give no guarantees as to their effectiveness. 25
Protect This flexible term assurance plan includes a choice of: Type of cover Life cover Critical illness Options at an extra cost Total permanent disability benefit Premium protection benefit Cover reinstatement option TERM Fixed Rolling Whole life In addition, Protect offers: policies in a plan, to cover as many key employees, partners or shareholders as your client needs different sums assured and optional benefits for each policy flexibility to add or remove policies option to increase the cover without underwriting when a key employee s salary, a loan, or the value of the business increases a unique permanent inflation option that can increase the cover each year optional waiver of premium, total permanent disability and cover reinstatement guaranteed premiums for the whole of a fixed term, for ten years at a time with a rolling term, or for life with a whole life term immediate cover see page 27 for more details an instalment option, so the sum assured can be paid out over four years instead of as a cash sum ability to write in trust ability to assign to a lender You can find full details of Protect in the adviser guide About Protect. 26
Immediate cover with Protect Our immediate cover facility gives full life cover for 30 days. It is available for applications for Protect where: the life assured is aged under 60, and the sum assured does not exceed: 3 million for life cover only, or 1 million for life cover with total permanent disability benefit, and the Protect application is fully completed and no further medical evidence is needed because of any information disclosed (we will request further medical evidence as a matter of course if the sum assured exceeds specified limits), and we received all the financial information that we need, and an immediate cover facility form is signed and returned with the completed application form and direct debit instructions, or a cheque for the first premium. If the application does not qualify for the immediate cover facility, our normal underwriting procedures will apply. An example of the form you should use to apply for this facility is on the next two pages. Please ask your Old Mutual Wealth Sales Consultant for a copy when you need to use it. 27
Immediate cover with Protect (Continued) Example Sample immediate cover facility form IMMEDIATE COVER FACILITY FOR BUSINESS PROTECTION Use BLOCK CAPITALS only and use blue or black ink. 1 EXPLANATION The immediate cover facility is available at no extra cost for business assurance and key employee applications for Protect. Limits This facility is available to you provided: the life assured is aged 60 or under the sum assured does not exceed: Type of cover Life cover Life cover with total permanent disability benefit Facility available for sums assured up to 3 million 1 million If an applicant applies for more than one policy, the limits above apply to the total life cover. Cover will be provided from the date the application form is received at our Head Office. We will accept the application immediately providing: the limits shown above are not exceeded the Protect application form is fully completed and no further medical evidence is required as a consequence of any information disclosed (NB we will request further medical evidence as a matter of course if the sum assured exceeds specified limits) we have received any financial information that we require (see overleaf for details of when we will need this) this immediate cover facility form is signed and returned with a completed application form and direct debit instructions, or a cheque for the first premium. We will confirm the date the cover starts in writing. If we are unable to accept the application on standard terms, we will offer revised terms wherever possible. Cover would then start once you agree to these non-standard terms. In all cases, immediate cover will stop after 60 days if we do not receive satisfactory health information within this period (where we have requested it due to the size of the sum assured). The cover will stop earlier than 60 days if the information we receive means we cannot continue to provide cover on the same terms. We will cancel the relevant policy/policies from outset. Where we are able to offer revised terms, the cover will restart as a new policy/policies on these revised terms, subject to your consent. If cover ceases, we will let you know as soon as is practical and within 65 days from the date the immediate cover starts. We reserve the right to retain the premium under these circumstances. If the application does not qualify for the immediate cover facility, our normal underwriting procedures will apply. In all cases, the acceptance letter is sent out when the policy is issued and the cover starts. 1 of 2 28
2 DETAILS OF POLICYHOLDER(S) AND LIFE/LIVES ASSURED First policyholder First life assured Date of birth (day/month/year) Second policyholder (if any) Second life assured (if any) Date of birth (day/month/year) Please sign the declaration below. 3 DECLARATION I/We understand that you will cancel any cover under the immediate cover facility, if you do not receive satisfactory health information at your Head Office within 60 days of receiving the signed Protect application form. I/We understand that if you cancel any cover under the immediate cover facility, you will offer revised terms where possible. If I/we agree to these revised terms, then the cover would restart as a new policy/policies. I/We understand that if I/we have not enclosed a cheque for the first premium or completed a direct debit instruction with my/our application form, cover will not start until you have notified me/us that my/our application is acceptable and I/we have paid the first premium or provided a completed direct debit instruction. Signature of first policyholder Signature of second policyholder (if any) Date (day/month/year) Date (day/month/year) 4 FINANCIAL UNDERWRITING LIMITS This table shows the limits above which we will always need financial evidence. Types of evidence Class 1/2 Class 3 Class 4 Financial questionnaire (completed by you and your financial adviser) 800,000 400,000 300,000 Independent financial evidence 1.5 million 1.25 million 1.25 million Class 1: office based professional, clerical and administrative work only. Class 2: occupations that are almost entirely managerial or administrative, but which are not office based. Class 3: occupations requiring skilled manual work. Class 4: occupations requiring heavy manual work or unskilled process working. If you require further clarification regarding the financial evidence required, please call our Underwriting Helpline 023 8072 6908 between 09.00 and 17.00 Monday to Friday. www.oldmutualwealth.co.uk Calls may be monitored and recorded for training purposes and to avoid misunderstandings. Old Mutual Wealth Life Assurance Limited is registered in England & Wales under number 1363932. Registered Office at Old Mutual House, Portland Terrace, Southampton SO14 7EJ, United Kingdom. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Financial Services register number 110462. VAT number 386 1301 59. When printed by Old Mutual this item is produced on a mixed grade material, which uses a combination of recycled wood or paper fibre from controlled sources and virgin fibre sourced from well-managed, sustainable forests. PDF7801/211-6073R/October 2011 2 of 2 29
How can we help you? We offer a comprehensive range of support to financial advisers, including personal contact, website and a full range of product literature. Contact us To get in touch with us, you can telephone your Old Mutual Wealth Sales Consultant or one of our helplines. Customer services 0808 171 2600 (option 2) if you need guidance on completing a form or have questions about a policy our Customers Services team can help. Underwriting 023 8072 6908 our underwriters will be happy to discuss any case with you before you send us the application. Talking through the details can avoid any delays in the underwriting process. Technical 023 8072 6010 the Technical team will answer any technical queries about tax and financial planning. Our website you can also find information about Old Mutual Wealth products on our website, www.oldmutualwealth. co.uk/adviser/products The literature you might need Protect About Protect (adviser guide) 3 Application form 3 Key features document 3 Explaining Protect 3 General Business Assurance Trust 3 Illustrative Cross-Option Agreement 3 Old Mutual Wealth s trusts at a glance 3 Financial questionnaire 3 We also have a range of sales and technical support material. All of these can be found on our website, www.oldmutualwealth.co.uk/adviser/business_protection/ 30