Business Protection

corporate co-director

insurance

KEEPING YOU ON COURSE

You can remain incontrol even when the unexpectedstrikes.

IntroductionOn death the shares of a deceased director form part of their estate. Those who inherit the shares may

not want to get involved in the business or conversely the surviving shareholders may not want the

next of kin to come into the business. The most feasible option is to sell shares back to the surviving

shareholders. This would require the shareholders to produce a substantial lump sum. The solution is

business protection - an arrangement can be put in place whereby on the death of a shareholder, funds

become available to buy shares back from the next of kin.

It won’t happen to our companyThe odds of one shareholder dying or becoming seriously ill before retirement are probably higher than

you think.

Age Sole 2 shareholders 3 shareholders

35 13% 23% 32%

40 12% 22% 32%

45 12% 21% 30%

50 11% 19% 28%

(Odds of one dying before age 65)Source: mortality tables (AM92) published by the Institute of Actuaries (UK)

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Ask yourselfHow would your business survive if one of the

business owners became seriously ill or died?

If your business partner died what would happen to

their share of the business?

How would you feel about a shareholder’s family

joining your business if he/she died suddenly?

If you died what would happen to your share of the

business?

Are your spouse or children in a position to take

your place in the business?

How will your family survive financially?

Implications if business protection is not put in placeSurviving Shareholders

Loss of control

If the deceased owned more than 50% of the

company the other shareholders would now

find themselves having to work with a new

controlling shareholder, possibly the deceased’s

spouse or one of his/her children.

There could be disagreements about how the

business should be run, particularly if the new

shareholder had no experience of the business.

Refusal to sell

The ideal outcome for the surviving shareholders

may be to buy back the deceased’s shareholding

from his/her next of kin. But what happens if

they refuse to sell?

Lack of liquid capital

Even if the deceased’s next of kin are willing to

sell the surviving shareholders simply may not

have sufficient liquid capital to buy the shares

from them.

The surviving shareholders could borrow the

necessary funds but they would then be faced

with the burden of loan repayments for years to

come.

Shares pass to outside party

If the deceased’s next of kin want to

sell and the other shareholders are

financially unable to buy then the

deceased’s next of kin may have to sell

the shares to an outside third party, possibly a

competitor or someone totally inexperienced in

the business.

Next of Kin

An illiquid asset

If the shares are not sold, the next of kin may be

left holding a ‘paper asset’ producing little or no

income. The position could be even more serious

if the shares also give rise to an immediate

inheritance tax liability for dependants.

No ready market for shares

The company’s Articles of Association may give

the other shareholders the right to block the sale

of the shares to any outside party. The next of kin

could therefore be forced into a ‘fire sale’ of the

shares to the other shareholders at a low price

in the absence of any other realistic offer for the

shares.

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We have a solution to suit

your type of business

How it worksWith Corporate Co-Director Insurance, the company enters into a legal agreement with each of its

shareholders to buy back shares from their personal representatives in the event of death.

The company takes out a life assurance policy on each shareholder, to provide funds to enable the

company to fulfil its obligation under the agreement.

In the event of death, the proceeds of the life assurance policy are payable to the company to be used

to buy back shares from the deceased’s next of kin.

The major advantage of the “Corporate” arrangement is that the cost is borne totally by the company-

with no benefit-in-kind (BIK) implications for the individual shareholders.

This expense for the company is not tax deductible.

Legal AgreementContingency purchase agreement - is a legal agreement put in place between shareholders and the

company, giving the company an option to buy the shares back from the deceased’s next of kin and the

next of kin an option to sell the shares to the remaining shareholders. If both parties mutually agree

not to exercise the option, the deceased shareholders’ successors retain shareholding and come into the

business.

Professional AdviceThe complexity of the corporate share purchase arrangement means it is a method of share protection

insurance that should not be considered without the assistance of legal and taxation advisors.

This is because it needs to comply with Company and Revenue Law.

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Navigation Wealth can help keep your business on course

Tax PositionCompany

The life assurance policies are issued to the

company who pay the premiums.

Under current legislation and revenue practise

it is our understanding that the premiums

would not be tax deductible for Corporation

Tax purposes while the proceeds are likely to be

exempt from Corporation Tax.

If the policy is part of a corporate share buy back

arrangement then the proceeds are likely to be

treated as a Capital receipt for the company.

The proceeds of a company owned policy, paid

out on death or disablement, are exempt from

Capital Gains Tax. So no tax liability arises for the

company on the proceeds of the life assurance

policy

Next of Kin

Shares passing to a legal spouse are exempt

from Capital Acquisitions Tax (CAT/Inheritance

Tax) but shares passing to any other individual

will be subject to normal CAT rules. The disposal

of the shares by the next of kin shortly after a

shareholder dying will result in the loss of any

business property relief (as one of the conditions

attaching to that relief is that shares must be held

for a period of six years – the buyback will break

that condition).

The sale of shares back to the Company from

which they were issued by next of kin, after a

shareholder dying, would normally give rise to

income tax implications i.e. the full value of the

payout to the next of kin would be taxed as though

it were income.

However if certain conditions are satisfied the sale

of shares back to the Company will generate a

liability to Capital Gains Tax.

Capital Gains Tax would only arise for the next

of kin in respect of any increase in the value of

the shares from the date of death to the date of

disposal. It is unlikely there would be any such

increase in share value in a private company,

which has just suffered the death of a shareholder.

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KEEPING YOU ON COURSE

Navigation Wealth LimitedUnit 1G/1F,

North Valley Business Centre,

Old Mallow Road,

Cork

T: 021 490 9104

info@navwealth.ie

www.navwealth.ie

Navigation Wealth Ltd trading as Navigation Wealth is regulated by the Central Bank of Ireland.

Company No. 394662. Registered Office: Cuil Greine House, Ballincollig, Co. Cork.