Key Person Protection – Are You Covered?

Following on from my 2 previous posts on business protection, in this post, I will run through an example of why Key People within a business may need protecting using the same 2 companies – ABC Ltd and XYZ Ltd as examples.

When Bob died, he was generating 50% of the company’s £1,000,000 turnover. He had also, just before his death, lent the Business £100,000 for a new widget. This loan must be paid back to the family by the business on his death.

At ABC Ltd whilst trying to figure out what they are going to do regarding the shares, they have no idea how the Company is going to survive without Bob’s sales skills or how they are going to repay the debt.

At XYZ Ltd, who were faced with similar issues, they had previously identified Key People within their Company who would have a big impact if they were no longer able to work due to death or critical illness. As well as some key members of staff who were not shareholders, Sam had been included. The Company had set up a plan to provide a lump sum that represented the loss of profits for a year and replacement recruitment costs for each of the key people. They had also implemented a plan to cover the loan that Sam had made to the Company. On Sam’s death, the Company received 2 lump sums – one to cover lost profits and protect the business and another to repay the loan to Sam’s family.

Author: Alice Douglass, Grosvenor Consultancy Ltd

There are advantages and disadvantages to using all of these strategies and they depend on individual circumstances so don’t take action without seeking competent advice. Tax rules, rates and allowances are all subject to change. The Financial Conduct Authority does not regulate tax advice and some forms of offshore investments. The value of investments and the income from them can fall as well as rise and you may not get back the full amount you invested.

The information contained within this document is correct as at 2015/16 tax year and are based on current government legislation. These can change.

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