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Not just for Christmas

He is the ultimate keyperson. Entrepreneurial skills and unique qualities finely tuned. Christmas would be a very different festival without him and the impact on the bottom line for the UK retail trade would be dramatic. Father Christmas is recognised as the leader in his field.

But he is not the only key-person in the business of Christmas. I&#39m sure you can think of many more.

The same applies with the UK&#39s small and medium-sized enterprises, where the keypeople are not exclusively bosses. In a recent Legal & General survey, Business Intentions research 2002, while owners, managers and directors were recognised as being key, 31 per cent of businesses identified other vital people. For example, head chefs, foremen, skilled workers and sales/marketing roles.

In this context, we can all think of a local restaurant whose reputation depends almost solely on the skills of their chef. What would happen to their business if that chef were not around due to serious illness or death? This would have a dramatic impact if it occurred at any time, never mind at the height of the festive season.

The research highlighted not only a shortfall in business protection cover among small and medium-sized enterprises but also a lack of understanding. This is emphasised by the 42 per cent of business owners who do not have cover, saying they did not know what business protection was. An ideal opportunity, therefore, to raise the subject. For many organisations, this will be for the first time.

When grasping these opportunities, financial underwriting considerations will arise. Established businesses require close attention to the detail but salary and gross profit contribution is available as a guide to levels of cover.

On the other hand, recently established businesses present their own financial underwriting challenges. For these newly established organisations, there are a number of ways that help to substantiate the appropriateness of the sums assured. For instance, business plans with projections of growth and profit will be available.

Also, any loans and capital at risk will assist to paint a picture. In addition, CVs of the keypeople can complete the picture, since their previous experience will do a lot to identify why their contribution will be vital in their new environment.

Additionally, issues around taxation will need to be covered. Unusually, there is no direct legislation on the subject of taxation of keyperson policies. The guidance is that companies should always consult their own tax inspector.

The local tax inspector&#39s decision will then be made against the backdrop of the principles set out almost 60 years ago by the then Chancellor of the Exchequer John Anderson. This advised that premiums under keyperson policies would be treated as allowable deductions and the benefits as trading receipts if:

•The insurance is employer on the life of employee.

•The intention of the insurance is to meet loss of profits resulting from the loss of services of the employee.

•The policy itself is a shortterm insurance.

The fact that policy proceeds can be taxed as a trading receipt on claim means that it could be appropriate to arrange for policy benefits to be payable in instalments over, say, two, three or five years to spread/reduce the impact of corporation tax. This is also a useful alternative way to inject regular annual payments during the business recovery period following a claim.

The guiding principles apply if the employee is also a director of the company. However, if the director concerned is a controlling director, then it is unlikely that the company&#39s tax inspector would permit tax relief on the premiums. He would normally view policy proceeds as personal benefits under these circumstances.

Following a claim, the value of the company might increase. Should the keyperson be a shareholder, then the value of the estate might be increased accordingly. If the shares then pass to someone other than a spouse and therefore business property relief is not fully available, then IHT liabilities could increase. This raises the opportunity to make tax-efficient recommendations on director share protection.

With 100 per cent of businesses in the research confirming that they have at least one person whose loss through death or serious illness would impact their profits, 2003 looks set to offer advisers attractive opportunities. Business protection should be for life (and critical-illness cover) not just for Christmas.

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