Ask the expert - Business protection with Jon Hall, Scottish Widows

richallum

We didn't have time for all the questions from today's Online Assembly so I've posted them here and @JonHallSWP has kindly offered to answer them.

1. With shareholder protection, what happens if one of the shareholders is declined for cover?
2. Can a key person policy be assigned if that person leaves?
3. If a key person has left the business and is then ill or dies and the policy is still in force, can the company make a claim?
4. RLP - who can be covered?
5. Can a director use an RLP to provider mortgage cover?
6. Is it ok to use a provider’s draft trust deeds and option agreements?

JonHallSWP

Hi everyone, I hope you found the session useful and thanks for your questions!

With shareholder protection, what happens if one of the shareholders is declined for cover?
Not an ideal scenario, but always a possible outcome if it's not possible to agree terms for one of the business owners. Usually, this would mean amendments to the option agreement so that the uninsured individual was still in line to participate in any share transactions, but they would need to provide funding by some other means.

Can a key person policy be assigned if that person leaves?
Generally, yes - but only if the assignment is from the employer to the employee as in individual. I'm not aware of any solution to reassign a keyperson policy to a different employer, as assigning between businesses would mean the policy is viewed as 'secondhand' by HMRC, significantly complicating the tax treatment at point of claim.

If a key person has left the business and is then ill or dies and the policy is still in force, can the company make a claim?
The short answer is no, because the policy wouldn't be valid. Key person cover is written on a 'life of another' basis, which requires an insurable interest between the proposer (the company) and the life assured (the employee). This insurable interest would cease when the employee leaves the company, as they are no longer a key person to the business. In practice, the policy should be cancelled at the point an employee leaves but if it remains on risk and a claim is made, the insurer would decline the claim and may look to refund premiums paid since the employee left.

RLP - who can be covered?
The life assured needs to be a salaried employee of either a LTD company, an LLP, a sole trader, a partnership or a charity. The maximum age at expiry, set by HMRC, is 75. In some cases, it is possible to insure an overseas employee where the company is UK based. The relationship between policyholder and life assured must be that of employer/employee, so this excludes sole traders themselves and partners in LLPs or traditional partnerships.

Can a director use an RLP to provider mortgage cover?
Strictly speaking, RLP is intended to provide a lump sum for the deceased employee's family to live on, but this lump sum can be used however the beneficiaries see fit (so could be used to clear a mortgage, for example). Some insurers offer RLP on a decreasing basis, but it could be argued that such policies are within the letter but not the _spirit _of HMRC's ruleset.

Is it ok to use a provider’s draft trust deeds and option agreements?
Off-the-peg trust deeds are absolutely intended for use, provided the required outcome is possible within the confines of the deed - there will always be circumstances where a bespoke trust is required as insurers can't cater to every requirement within their trust proposition. Option agreements are more nuanced, as they will need to work in tandem with the articles of association to deliver the right outcomes when a claimable event occurs. These are best treated as a draft/scaffold/starting point for the creation of an agreement specific to the business - usually this is drawn up by the accountant and occasionally with input from a solicititor. The insurer providing the shareholder protection policies won't be party to the option agreement, so can't enforce this expectation in practice.

richallum

Thanks for taking the time to do that @JonHallSWP

les_cameron

@JonHallSWP Can a non paraplanner (just one in spirit) ask a question please?

Where the employee leaves the cover ceases as there ceases to be insurable interest. Is this a particular feature of business protection as my general understanding was insurable interest only needed to exist at outset?