At Pivotal Financial Planning we are proud that all our Financial Planner’s are self-employed just like many of our clients. That is one of the reasons we are very passionate about minimising the risks to our business customers and their families. Whilst sole traders, partners and directors all have different priorities, a review with one of our advisers will often highlight areas that they have not considered, but could benefit from. The review is free and can expand your options to protect the interests of both your family and a business you’ve worked tirelessly to grow.

Below we take a look at the issues facing shareholders who also work in the business.

Sam & Dave: Business Protection Insurance

Sam and Dave have been friends for years and decide to enter business together. Being entrepreneurs, they are naturally optimistic types. After all, what can go wrong? They are young, healthy and who wants to sit down and discuss the gloomy prospect of the consequences of what might happen if one of them was not to be around. Or to put it another way – dies! Especially when the business is going so well.

They both have young families and it’s great to build up a business that they can pass on to the next generation.

But then, do you know what? Fate plays a bit of a joke on them. One day, Sam just doesn’t wake up. He’s been working so hard that it’s taken its toll and he’s suffered a massive stroke.  Same thing happened to his father, apparently.

Thank goodness he had put some life assurance in place. At least Kate and the kids will be looked after. Well, there’s enough to pay off the mortgage anyway.

Then the dust settles. Not only has Dave lost the business partner he set out with. All of a sudden he has three new shareholders that he didn’t foresee – Kate and her two teenage children.

Because Sam has died without a Will, his shares have passed to Kate and the kids! At a conservative estimate they are worth about £500,000. Fortunately, there’s no Inheritance Tax because the shares attract Business Property Relief. But what does Dave do with his new shareholders? To be fair, even if he wanted them in the business, they don’t have the expertise to run it with him. Kate would love Dave to have the shares but… £500000. That’s money she could do with to look after the kids.

What can they do?

Well, let’s do them a favour and turn the clock back. We’ll give them the chance they wouldn’t get in real life.

As soon as they set up the business they suffer a serious bout of reality. They decide to sit down and make plans for the future in conjunction with their Financial Adviser .

Following their advisers recommendations the first thing they do is set up a cross option agreement. That means that if one of them dies, the other has the option to buy the shares.

Then they put the life assurance in place to make sure the funds are there to pay for them and go to the beneficiaries. They write the policies in Trust so that the proceeds don’t attract IHT.

At the same time, they each write a Will to ensure the shares in the company go to their beneficiaries.

Furthermore, Sam and Dave take good advice and implement their planning using a Trust, which will minimise tax, ensure their wishes are carried out immediately – so that there is no impact on the business – and give the beneficiaries all sorts of protection for the future (Trusts are great!).

So Sam still dies – sorry, Sam – but this time the Will kicks in. The cross option agreement is implemented. Dave gets the shares and Kate and the children get the proceeds.

So we can’t help Sam and his congenital condition but, with a bit of forward planning and a reasonable dose of reality, we can make sure that everyone can get on with their lives as normally as possible. Dave keeps the business going and retains 100% shareholding and Kate, who never wanted to run a business in the first place, gets the rewards of Sam’s efforts and can at least provide financial security for the children.

So amid the excitement of making all the plans to make your business successful, don’t forget the boring bits! Just take a bit of time and some good advice so that it doesn’t all crumble if, after all, you prove not to be immortal.

Business Protection – A Case Study

Business protection insurance can secure your loved ones future, should the worst happen. This case study is a video from Charles and Libby and is an example of how business protection can be of value.

Will writing is not part of the Quilter Financial Planning offering and is offered in our own right. Quilter Financial Planning accept no responsibility for this aspect of our business.
Business Property Relief Schemes (BPR) invest in assets that are high risk and can be difficult to sell such as shares in unlisted companies. The value of the investment and the income from it can fall as well as rise and investors may not get back what they originally invested, even taking into account the tax benefits.
Inheritance Tax/Estate Planning and Trusts are not regulated by the Financial Conduct Authority. Tax treatment varies according to individual circumstances and is subject to change.