Simon Gibbons

Business Protection

Many businesses have key employees , without whom the business could suffer dramatically, even catastrophically.

Unfortunately, many businesses fail each and every year due to the death or long-term sickness of a key employee. The right type and level of business protection can help and sustain your business through difficult times.

Director's Share / Partnership Protection

Director's Share Protection
Many small businesses run as private companies, with a comparatively small number of people owning the company as shareholders and running it as directors, which is particularly the case for family companies.

Although a company will not be dissolved on the death of a director, the surviving directors run the risk of the deceased director's shares passing to someone with no interest in the company, or even to another company which may then be in a position to make a takeover bid.

The surviving directors will want to keep control of the company and probably would not like the deceased's spouse to sell the shares to a (perhaps unknown) third party with whom they might not be able to work amicably.

Partnership Protection
Many small businesses operate as a partnership of two or more individuals. Where one partner dies, their share of the partnership passes to their estate and, technically, the partnership is dissolved. This may not be convenient for the beneficiaries of the estate or surviving partners, with the surviving partners effectively in partnership with the deceased partner's heirs, and they may not understand or be able to work in the business, particularly if formal qualifications are needed.

It is often in the interests of all concerned for the surviving partners to buy out the interest of the deceased partner and for the heirs to receive a cash sum for this. Thus, it is frequently recommended that the partnership has an agreement including a clause enabling a buy-out to take place.

For either Directors' Share or Partnership Protection the options to consider are:

• Buy and Sell Agreement
  This means that the surviving partners have a legal obligation to buy the deceased partner's share from the estate, which has a corresponding obligation to sell.
• Cross Option Agreement
  Cross Option Agreements are not binding contracts for sale so they do not prevent Inheritance Tax (IHT) business property relief being claimed on a partner's death.

Further Considerations

Life policies
There would be little point in having an agreement unless the surviving directors/partners were sure they would have the funds to match their obligations. We can advise you of the most suitable solution for your business.

Critical Illness
The critical illness of a Director or Partner could cause similar problems to death. This is often affected with a 'single option' as they may well return to work at some stage and would not want to be forced into selling their share in the business.

Trusts
Specialist share protection trusts are available. These are usually flexible power of appointment trusts with the shareholders/partners other than the life assured as the current beneficiaries.

The benefit of these types of trust are that this is not seen as a gift with reservation for Inheritance Tax as it is a bona fide commercial arrangement.