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No keyman is an island

Last week, I looked at the importance of owner/managed businesses having sufficient life and critical-illness cover to provide liquidity either to maintain loan repayments or to clear outstanding debts in the event of the death or critical illness of a key contributor to income and profit.

In many cases, these “key contributors” will also be owner/managers. For companies they will be shareholding directors, for partnerships they will be equity partners and for LLPs they will be members. And don’t forget sole traders, in many ways the most “key” of keypersons. In the majority of cases the sole trader is the business and, without them, severe financial loss is likely to be felt by their family/dependants (following death) or them-selves following critical illness.

As I have said on many occasions, the main challenge to the financial services sector in closing the protection gap in general, and the business protection gap in particular, is not the tax and legal aspects of keyperson insurance but the creation of sufficient anxiety in the minds (and guts) of the “at risk” business owner.

This is not to say that getting it “tax-right” is not important though, especially at a time when revenues and profits are more likely to be under pressure, reducing the cost of cover through tax effectiveness will be especially important.

Getting risk (and its coverage) on the agenda and “to do” list of business owners is hard enough at the best of times – it is likely to be even more so in the current environment.

You do not need me to tell you that businesses are always less willing to spend on “intangibles” that bring no immediate benefit – other than the removal of anxiety and its replacement by peace of mind that is. The key here, naturally, is to make the business owner aware of the severity of the consequences of being “uncovered” so the necessary level of anxiety is created – justifiably, of course.

Most in the business would probably say that the tax rules on keyperson policies are not hard to understand. Many would even quote (or at least paraphrase) Sir John Anderson in his famous 1944 statement which set out taxation principles for keyperson insurance. There is, especially in connection with business owners though, a little more care required, and where more knowledge gives you the ability to give a better answer there is the chance for you to differentiate.

So over the next few weeks and drawing on the excellent (if I say so myself) content within our Techlink online service, I will be looking in more granular detail at the fundamentals of tax relief (on premiums) and tax assessment (of the sum assured) in connection with keyperson cover.

In this review, I will be referring to practice, any relevant legislation, case law and appropriate sections of the HMRC Business Income Manual (BIM). What my research on this seemingly mundane subject has taught me is that it can be positively dangerous to rely exclusively on “what has always been” and what is, sometimes superficially, dealt with in more generic publications.

Differentiation can be substantively secured (rather like a deadline transfer of a certain highly talented Russian footballer was “substantively completed”!) by knowing more and proving that you know more.

Clients “buy” an adviser for what they know and what they know is the foundation on which all profitable long-term business relationships are built. This will also be true of IFA consultants. Many will talk of being the IFA’s business development partner but they all need to keep in mind that the proof of this will be what you do rather than merely what you say.

As many will have noted, a key facet of the RDR principles is that the advice given to (and, if appropriate, products selected for) the client must be free from provider influence. The proposed requirement for the clear identification and separation of the cost of advice from the product charges is a significant contributor towards greater recognition of the importance of clarity.

The proposed abolition of funding or factoring through “up-front” commission will also be a significant contributor to the removal of bias and influence.

Where can IFA consultants differentiate, given that providers cannot “influence” sales through “up-front” commission levels. Well, through their knowledge, understanding, communication and relationship skills as evidenced in appropriate, timely and business-generating support.

But will provider support through technical support, training and business development services, that is, support that is not directly connected to the providing products, be permitted in the future?

The RDR to date does not, it seems, give a definite answer to this question but it is to be hoped that, provided the choice of a provider’s product can be justified based on the suitability of the product alone (so the client is not disadvantaged at a product level) the fact that the provider chosen delivers additional support that directly or indirectly facilitates better advice will not be seen as offending the “no provider influence” provisions.

There is a way to go yet, so we shall have to wait and see. With the inevitability of increasing product commoditisation, though, this issue will be an important one. Clarity will hopefully emerge as we progress towards implementation.

I am conscious that I have strayed a little off the subject of keyperson cover but hopefully you found the diversion interesting.

In closing, I would reiterate the importance of taking a professional approach to all financial planning subjects and resisting all temptation leading to superficiality Next week, I will (at last) look in detail at the rules for the tax treatment of premiums and sums assured under keyperson cover policies with particular focus on policies on the lives of owner/managers.

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