An IFA has approached me as he is setting up relevant life plans for three directors/shareholders of a company, who are all in the same family. I understand that the purpose of these plans is to ensure that the interests in the business continue to be held by the remaining members/shareholders, on any of the directors deaths through use of a Shareholders Agreement and Cross Option Agreement.
Usually, the IFA would create a Cross Option Agreement, however for some reason the IFA says they are not available for the policies which are being put in place.
From research (and this is not my area) it appears that the policies could be written in trust, which I believe would need to be of a discretionary nature to avoid conferring an absolute interest on named beneficiaries in specified proportions as this would bring the insurance proceeds within those beneficiariesâ estates for IHT, which would also result in a deemed potentially exempt transfer (PET). Is the usual procedure that the proceeds are written in trust with the policy providers? Otherwise, if a separate trust was set up of a discretionary nature would this mean it would be taxed under the relevant property regime?
I have seen on files previously, nominations completed in order that the policy proceeds pass direct to the surviving spouse, however in this case can any protection be given against the spouse using the money for other purposes?
The major providers of ârelevant lifeâ policies make it clear in their technical literature that relevant life policies cannot be used in âshareholder protectionâ arrangements.
Relevant life policies are a type of âexcepted group life policyâ. The HMRC guidance (IPTM 7035) states:
So, for instance, business-cover type policies which pay benefits to other partners of a partnership or shareholders of a company to enable them to buy out the share of the business owned by the deceased partner or shareholder are not excepted group life policies.
If the policy is not âexceptedâ it falls into the chargeable event regime.
The IFA should get clarification from the policy provider as to the suitability of this type of policy for its intended use. Assuming a negative response, other options should be investigated.
Although relevant life policies serve a purpose and are owned by the business, they donât actually ensure the interests of the business or remaining shareholders. This is because the nominated beneficiaries are usually the families of the lives assured and these policies are not really designed for the objective you have mentioned (or at least there are far more suitable options).
The IFA should be looking at shareholder protection and/or key person insurance for the objective youâve highlighted above. I would question the IFAâs motive and understanding of the overall purpose trying to be achieved. There may be a need for relevant life but as an IFA myself, it appears he or she needs to revisit business protection and their different applications.
Relevant life plans are used to provide a âdeath in serviceâ benefit that pays the life assuredâs family a lump sum in the event of their death. The plan is taken out by the company on the life of the employee/company director and is written under a discretionary trust which amongst others includes the life assured. They cannot be used for shareholder protection.
If shareholder protection is required you need to look at a business protection plan.