View more on these topics

The Owl service

Continuing our look at share purchase arrangements between owners of limited companies (noting, again, my avoidance of the more commonly used term “director share purchase” as the arrangement relates to the owners of a business, not the man- agers), last time we discussed the funding requirements to buy out the shares of a deceased shareholder.

After only briefly looking at possible appropriate types of insurance policy, at the end of the last article I flagged the next issue by posing the question as to the way in which the life insurance pol-icy should be effected, including the payment of premiums (that is, paid by who?)

Fundamentally, the choices include whether the policy should be written on an own-life basis in trust or assigned, joint-life or on life of another.

It is convenient here to continue using the example company used throughout this series of articles – Owl Sewerage Services Ltd – for which we have identified the following financing needs shown in Table A in the event of the death of one of the four shareholders:

Put simply, £400,000 would be needed following the death of Trevor to buy out his shareholding – half of this being required by Joanne, with 25 per cent each needed by Lynne and Paul.

Following the death of Joanne, £300,000 would be needed, divided as outlined above between the three surviving shareholders (reflecting, of course, their current proportionate holdings).

Let us deal with the possibility of effecting these policies on a joint-life basis.

This can be seen for this company to be almost certainly a non-starter. Although the financing needs between Joanne and Trevor are very similar – £172,000 against £200,000 – this is not the case between other combinations of shareholders, not least because of the complete absence of financing needs on the death of Lynne or Paul.

Even in circumstances where the level of required death benefits between shareholders is similar, the inflexibility of joint-life policies, especially regarding the inability to change the beneficiary easily and his or her share of the death benefits, usually rules out this method of effecting the life insurance policies.

Turning, then, to effecting the policy on a life of another basis which overcomes the requirement for every shareholder&#39s life to be insured.

It also permits different levels of life cover on, and for the benefit of, different shareholders.

Against this method, it may be seen to be a little unwieldy where there are a bigger number of shareholders on whom life cover is required and/or where there are a bigger number of beneficiaries required to receive benefits.

Additional complications can arise where changes in shareholdings occur – for example, shares change hands – as this will frequently necessitate structural changes in the life insurance with which these types of policy might find cumbersome or impossible to cope.

Finally, among potential problems, insurable interest may not always be straightforward (although this need not always be a problem if appropriate legal agreements are in place relating to the transfer of shares on a shareholder&#39s death).

Overall, most commentators agree that this method of effecting life policies within share-purchase strategies can easily and advisably be discounted.

Far better, most agree, to effect the life policies on an own-life basis, either assig-ned or effected in trust for the benefit of the remaining shareholders.

Returning to our example, an own-life own-benefit policy could be effected on Trevor for £400,000 and a similar policy on Joanne for £300,000.

This certainly overcomes any possible problems with insurable interest. If, then, assignment of the policies is preferred, difficulties may arise with the benefits being payable to more than one assignee, especially as there are different proportions of the death benefits payable to each remaining shareholder.

This could be overcome by effecting separate policies for each beneficiary, and this extra (slight?) inconvenience could be deemed worthwhile, noting that the ownership of the policies then passes to those beneficiaries with no need to monitor the continuity of their interest in the policy benefits, as could be deemed advisable if the policies were to be effected under trust.

Again, though, future changes in shareholdings will cause further complications.

Most commonly, I believe, policies for share-purchase strategies are effected on an own-life basis, written in trust.

There are no complications with insurable interest and a single policy can easily be effected as the percentage of benefits payable to each person can be noted in the trust document.

Future changes in shareholdings can be accommodated by amending the pro- portion of benefits and deleting or adding changes in shareholder as appropriate.

Difficulties can arise even with this method, however, primarily as regards the selection (and changes) in trustees, the discretion those trustees may enjoy in the payment of trust assets (that is, policy death benefits) and the (not always so straightforward) changes in beneficiary and potential beneficiary.

Overall, I regret to conclude that it is beyond the scope of these articles to try to justify a particular preference in the way that policies should be effected as much will necessarily depend on the circumstances of each company and the type of policy preferred by the adviser.

I have merely tried to identify and outline the main points which should be borne in mind when formulating recommendations on this issue.

I will, however, not shirk from justifying my preferred recommendations on the next issue – who should pay the premiums under these policies (whatever policies are selected, and however they are effected)?

Here, we are encouraged in other texts to consider the relative merits of:

•Each shareholder pays his own premiums, or

•Each shareholder pays an equal share of the total premiums payable; or

•Each shareholder pays a proportionate or inverses proportionate share of the total premiums payable; or

•Each shareholder pays an inverse proportionate share of the policies effected on the shareholders other than his own.

I will start to discuss each of these in outline, before trying to justifying my clear preference (being the last option in the above list).

First, I am totally convinced there is little or no merit, in the vast majority of cases, of considering each shareholder paying his own premiums. This leads to the individuals with the biggest shareholdings paying the highest premiums when, in fact, it is the other shareholders who will benefit most from the arrangement and from the financing provisions (as they will be provided with the funds to buy out the bigger shareholder).

This is clearly inequitable as is – although arguably to a lesser extent – the fact that older lives assured will pay higher premiums when, in fact, their higher age means they are more likely to die within a given period of time, which is more likely to act to the benefit of the younger shareholders (who, as above, stand to benefit from the death benefit payment under the policy).

So, if we accept it would be unjust for each shareholder to pay the premiums on the policy on his or her own life, how about each shareholder paying an equal share of the total premiums under all policies?

Again, I would suggest that this method still unfairly penalises (though to a lesser extent than the first option discussed above) those with the largest shareholdings and older participants – some of whom may be the lives assured but not the beneficiaries of any of the policies.

Next time I will discuss the latter two premium payment options listed above as being generally the fairest alternatives.

Keith Popplewell is managing director of Professional Briefing


&#39Loan cold-calling ban means big job losses&#39

Mortgage intermediaries are warning that FSA plans to ban cold-calling of potential clients would cause “mass unemployment” and put firms out of business unless they can find alternative sales channels.The proposals to prevent unprompted tele-canvassing and emailing to drum up new business, included in its near final rules section of CP146, would bring mortgage business […]

IFAs see surge in demand for cautious investment products, survey shows

Stockmarket volatility is causing IFAs to call for more cautious investment products according to research carried out by Axa.The survey show 72 per cent of IFAs are seeing increased demand for cautious investment products and 38 per cent of IFAs reported they are now avoiding equity-based products. A further 20 per cent said they wanted […]

Fines warning over claims forms

IFAs who fail to submit a claims form to the FSA by the end of October could face fines of hundreds of pounds, even if no complaints have been made against them, according to compliance consultancy PYV Corporate Resourcing. In the absence of any complaints IFAs should submit a nil returns form as required under […]

Abbey makes investing Ea5y

Abbey National has introduced safety plus growth 9, a guaranteed equity bond that provides minimum growth of 20 per cent and maximum growth of 55 per cent.The bond is linked to the FTSE 100 index through a Dublin-based company called Quaich Investments 9 and there is also an Isa version of the product. Both versions […]

India budget and the liquidity supercycle

Kunal Desai, manager of the Neptune India Fund, comments on how India’s 2017 budget will impact the Indian economy and equity market. Read article here: Important Information – for Investment Professionals only. Not for Retail Clients.Investment risksThe Neptune India Fund may have a high volatility rating and past performance is not a guide to future […]


News and expert analysis straight to your inbox

Sign up


    Leave a comment


    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm