This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult us here at Elmfield Financial Planning in Padiham, Burnley, Lancashire.
At present, the UK faces an immense period of business uncertainty in the wake of the COVID-19 nationwide lockdown. Currently, the Prime Minister has ordered that nobody should leave their home except for essential purposes (e.g. buying food). Pubs, bars, restaurants and many other businesses have shut their doors for the foreseeable future.
For businesses across sectors and industries, it was difficult to predict that 2020 would see such measures and to plan accordingly. Yet there are many areas of corporate life where we have much more control over the “what ifs”. Here, our Lancashire financial planning team will be discussing one such area; key person protection.
We hope this content aids your thinking on these important matters. If you’d like to speak to an independent financial adviser about your protection plan you can reach us via:
T: 01282 772938
What is key person protection?
A key person within your business is someone vital to the ongoing functioning of the business. This could be a company director, of course, whose helmsmanship is vital to help ensure the successful steering of the business towards its goals. However, a key person might also be a sales manager, chief technical officer (CTO) or another important staff member who is pivotal to the financial wellbeing and growth of the company.
Key person protection, accordingly, seeks to address the “what if” scenario where such a key person is unfortunately removed from the picture, perhaps due to death, serious injury or ill health. Such a situation could be devastating for the business, possibly resulting in:
- Company profits eroded or even lost.
- The need for recruitment and training of new staff.
- Loss of crucial business relationships and partnerships, linked to the lost person.
- Eroded consumer/supplier confidence in the business.
Key person protection is a special type of insurance designed to account for these kinds of eventualities, providing much-needed financial buoyancy to the business whilst it seeks to find the best course of action to address the situation.
Benefits of key person protection
Our financial advisers have helped many business owners in based in and around Blackburn, Burnley, the Ribble Valley and Rossendale Valley and surrounding areas to find the right key person protection for their needs, achieving benefits such as:
- Profit protection. Losing a key salesperson or another important staff member can often result in a loss in company profits. Key person protection allows you to access the funds you need to protect a loss in profits, should the worst happen to this person.
- Business value protection. By protecting aspects of your business such as loans and profit, you can help shield the wider valuation of your business. This could be key if you’re considering an imminent business sale, or merger/acquisition.
- Business loan protection. Many businesses have loans to repay, and losing a key person could jeopardise the prospects of repaying them fully or on time. Key person insurance can account for such a scenario by opening up funds to help cover these obligations.
Key person protection & corporation tax
There are many different policies on offer in the market, regarding key person protection. It can certainly help, therefore, to leverage the contacts, experience and resources of an independent financial adviser, who can help you survey the whole market for the best option for your needs. This professional can also assist with integrating your protection plan into your wider financial plan, ensuring the optimal tax position.
Bear in mind that key person protection can have a big impact on your tax planning. In certain situations, your company is able to claim the premiums as business expenses, which can affect your corporation tax bill. The main factor which determines the tax treatment of your key person protection policy concerns whether it meets the criteria of the “Amderson Principles”.
What about other types of taxes?
There can be other important tax implications to taking out a key person protection policy, which makes it even more crucial to engage in sound financial planning beforehand. In particular:
- Inheritance tax (IHT). If a policy produces a cash injection (due to its criteria being fulfilled), then this money is likely to increase the value of your business. If you are the sole business owner, then this could affect your IHT bill in the future. On the other hand, if the deceased is also a shareholder, then their estate is likely to increase in such a scenario. This could, in turn, increase their IHT liability.
- Capital gains tax (CGT). If a shareholder sells their shares after becoming diagnosed with a critical/terminal illness, then if these have risen in value a CGT liability might come to the fore.
Please note that these and other tax implications can arise from key person protection. This is not a reason to avoid finding the right policy, but rather forms a strong justification to find a professional adviser to help you navigate this complex tax landscape.
Invitation
If you are interested in starting a conversation about your financial plan, then we’d love to hear from you. Get in touch to arrange a free, no-commitment consultation with a member of our team here at Elmfield Financial Planning in Padiham, Burnley, Lancashire. Reach us via:
T: 01282 772938