When you run a business there are plenty of things to worry about and plenty of “what ifs” to consider.

Perhaps one consequence of the continuing coronavirus pandemic is to heighten the awareness of risk to a business from the ill health or death of a major shareholder or key member of staff.

Such events are of course always a possibility from many causes, but the current focus on health and wellbeing is a perfect opportunity to consider ways in which these risks can be mitigated.

Whether it is for your own business, or businesses you advise (if you are perhaps an accountant or a lawyer), there are many scenarios where appropriate planning can help to deliver a more favourable outcome.

Protecting the business ownership

When there are multiple shareholders in a business, the death of a shareholder can cause problems for the remaining business owners. Generally, in the event of death, the shareholding would pass to the deceased’s Estate and be dealt with under the terms of a Will or the rules of intestacy if no Will exists.

The beneficiary may have no interest in being in business with the remaining shareholders and vice versa, perhaps instead preferring to have a cash payment to use as they wish. All well and good, but if there is no money to fund the payment and no compulsion to either sell or buy the shares, then there is a problem.

This is where shareholder protection comes in. Provision can be made using life assurance to ensure that the funds are available for the remaining shareholders to buy the shares of the deceased. This can be coupled with an appropriate agreement to make sure the transaction goes ahead. Care needs to be taken at this stage to make sure there are no adverse consequences, such as inheritance tax falling due.

Protecting the business profits

Where a business is heavily reliant on a small number of individuals for generating a large proportion of the business profits, the death or long-term illness of such key employees can cause particular detriment.

This could be as a result of an immediate loss of skills and contacts, as well as a potentially lengthy and expensive recruitment process to find the right person to replace the individual.

Making use of keyperson protection to mitigate the loss of revenue and additional costs incurred can protect the business profits and help to aid a smooth transition. Again, it is important to structure this correctly to make sure it is cost effective and provides the benefit required in a timely manner.

Protecting the families of those in the business

Not only could the business suffer financially in the event of the death of an employee, but their families may also be left in a position of financial difficulty.

The loss of continuing income could impact on the ability to repay a mortgage and make raising children in the manner which would have been expected somewhat more challenging.

Life assurance can be used to fill the financial void left by the loss of a loved one and ensure that the family is financially secure. Many larger employers provide this as a matter of course via a group scheme, but it is less common for smaller businesses to have such benefits in place.

A relevant life plan can be used by an employer to provide valuable cover for an employee in a cost-effective manner, when set up correctly.

The premiums payable are an allowable business expense and there is no taxable benefit to the employee. This can provide a big saving in cost, especially for business owners who are perhaps paying for such cover out of their own pocket from after tax income.

Reviewing your needs

There are many ways in which appropriate protection can help mitigate risks for business owners and we are well versed in looking at these options. We are happy to work with other professional advisers and indeed would require and encourage their input in some aspects.

To arrange a discussion about how we can help you mitigate business risks then contact us now.

Lee Smythe MSc CFP
Chartered Financial Planner