In a recent survey commissioned by L&G and conducted by SME Continental Research, 99 per cent of companies put people at the top of their list as the most important factor in running a successful company.
This is welcome news and provides focus on why businesses, particularly small and medium sized enterprises (SMEs), should take action. Protecting businesses against the devastating impact of the loss of key staff through death or serious illness requires the IFA's assistance to bring it to the top of their agendas.
The prime areas that advisers can assist in are keyperson loss of profits, keyperson loan cover and partnership, and director's share protection. With the link to the availability of finance, loan protection cover tends to dominate the keyperson world, possibly at the expense of loss of profits cover.
When planning to discuss business protection with a decision-maker the issue you should consider raising is, who are their key people? In some organisations it's obvious, in other companies it's helpful to ask the following questions:
Would their absence temporarily or permanently impact on the bottom line?
Do they have strong customer relationships and highly-tuned sales skills?
Is their technical knowledge recognised by your customers?
Do they possess strong entrepreneurial skills?
Is their financial acumen of value to the business?
A yes means that the individual is likely to be a key person. It's then time to raise the issue of the risks that may arise if they were to be seriously ill or die. Risks include damaged credit status, loss of market share, loss of customers and failure to fulfil orders.
An example of how to establish the amount of cover required is shown in the box below. Now, let's turn to one of life's certainties – taxation.
With no direct legislation on the subject of taxation and keyperson arrangements, the principles were established in parliament in 1944. The then Chancellor's response to a question in parliament set the framework followed ever since. Provided that:
the relationship is one of employer/employee;
the cover arranged is for loss of profits;
the policy is short-term assurance,
the Inland Revenue may allow corporation tax relief on premiums. It would normally approve terms of up to five years, but not on convertible term or whole of life products. When relief has been given on the premiums, if a claim was paid this would usually be treated as a trading receipt in the year the claim became payable, and therefore subject to corporation tax.
It is not possible to make the assumption that electing to give up corporation tax relief on the premiums would necessarily result in the claim benefit being free of tax. Guidance should be sought from the Inland Revenue and specimen letters are available from providers to assist.
With regard to keyperson cover on the life of a controlling director, it is likely that the Inland Revenue would view the arrangement as being for the benefit of that director (as a majority shareholder) and therefore is unlikely to allow tax relief on the premiums.
In the current economic climate the opportunities to arrange keyperson loss of profits protection are there for the IFA to grasp.