Shareholder Protection Cover

The death of a shareholder in a private limited company can have a number of repercussions for both the deceased shareholders next of kin, and also the remaining shareholders. For example:

  • Do the surviving shareholders go into business with whomever inherits the shares?
  • Is there sufficient capital within the company to purchase the shares from the next of kin of the deceased?
  • Do the next of kin want to sell the shares?
  • Is there a ready market for the shares for the next of kin? Is there a risk they could be sold to a third party?

These issues can be anticipated, quantified, and mitigated against by putting in place Shareholder Protection cover.

The company take out a life cover policy on some or all of the shareholders, usually with a sum assured equal to the value of the shareholding. This sum assured can be amended as the company grows, or if the shareholders exit or join the business. The company pays the premiums, owns the policy, and is the beneficiary.

The life cover can provide liquid capital to enable the company to buy back the shares from the deceased’s next of kin, ensuring that:

  • The surviving shareholders retain full control of the business.
  • The deceased’s next of kin receive fair market value for the shares

These transactions are backed by a Shareholders Legal Agreement.

In the event of the death of a shareholder, the policy pays out the proceeds to the company, who use these funds to purchase the shares back from the deceased’s next of kin. The Shareholders Legal Agreement compels the transactions to take place, and this is completed and signed at the same time the cover is put in place.

Under current legislation and Revenue practice, these premiums would not be tax deductible for Corporation Tax purposes, while the proceeds, or death benefit, is likely to be exempt from Corporation Tax.

When the plans are set up as part of a Shareholder Protection arrangement, the life insurance proceeds are treated as a Capital Receipt, and are exempt from Capital Gains Tax. So, no tax liability arises for the company on the proceeds of the policies.

It is unlikely that there would be a Capital Gains Tax liability for the deceased’s next of kin. However, depending on who ultimately inherits the shares, there may be an inheritance tax liability.

As with all other aspects of financial planning, individually tailored advice is key. We would urge any limited company to address their current arrangements, and start the conversation about Shareholder Protection and how it can benefit both the surviving shareholders and the deceased’s next of kin.

If you would like to discuss this further, and how it intersects with your overall financial planning, and that of your business, please contact me at rossdevlin@pfp.ie and I would be delighted to assist you.

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