Shareholder
How to set up an arrangement
The following flowchart gives details of what the next steps are to go ahead and actually set up the arrangement. It's also a useful checklist and can help ensure that you've met all the requirements.
Check Articles of Association to see what they say about transferring shares
Do the Articles enable the shareholders to do what they want with their shares in the event of a death or critical illness of a shareholder?
Identify shareholders
Establish the value of the company. If not known, refer to the company accountant.
Articles can be amended by a solicitor, when this has been done please continue.
Possible solutions
Own life in business trust
Life of another
Company buy back
Each shareholder takes out an own life policy (usually written to retirement date) to be held under the business trust from the start. The sum assured should = value of life assured's shareholding
Choose appropriate option agreement for type of cover being taken out.
Tax treatment of premiums and proceeds
Premiums should be equalised to protect IHT effectiveness
Claim proceeds paid to trustees for benefit of other shareholders
Who will pay the premiums? Consider the tax treatment
Company pays but charges cost to director shareholders - not a benefit in kind
Company pays but doesn't charge cost to directors - taxable as a benefit in kind on shareholding director
Shareholder pays out of post taxed income - no tax relief for shareholding director
No chargeable event usually on death or critical illness
Pre owned assets tax charge - potential liability if settlor a beneficiary
Trust subject to discretionary trust IHT regime
Each shareholder takes out policy(ies) on the life/lives of other shareholder(s)
Choose appropriate option agreement. Usually written to retirement date of life/lives assured.
The sum assured should = value of life assured's shareholding. Premium equalisation not necessary.
The sum assured should = value of life assured's shareholding. Premium equalisation not necessary.
Tax treatment of premiums and proceeds
Shareholder pays premiums out of post taxed income - no tax relief for shareholding director
Claim proceeds paid to owner of policy and used to buy deceased's shares.
Legal requirements of Companies Act must be met. Please refer to our technical factsheet
on company buyback of shares for further details.
Company takes out policies on the lives of shareholders usually written to the shareholders' retirement date. The sum assured should = value of shareholding.
Consider appropriate option agreement. Commonly single option exercisable by company.
Tax treatment of premiums and proceeds
Tax treatment of sale & purchase of shares
Company pays premiums - no tax relief as not wholly exclusively a business expense. Premium equalisation not required.
Income tax treatment
Capital gains tax treatment
Purchase of shares treated as a dividend by company. Shareholder's estate liable for dividend on the price paid by the company over the original subscription cost
A number of conditions have to be met. Company can apply for advance clearance, confirming LCT treatment will apply
Deceased liable for capital gains tax on amount paid by company over shares original price.
Clearance from Inland Revenue when capital leaves company and company controlled by five or fewer people.
Company must notify Inland Revenue within 60 days of share buy back.