I recently had a meeting with a Business Consultant about the importance of making sure that her business owning clients had financial protection in place, just in case the worst ever happened. As with many business owners, Susan did not see herself as the MOST important person to her business and, she had forgotten how much their families are reliant on their income. As the conversation continued she started to look at her own situation.
Susan had set up her business consultancy, 3 years ago, after number of years working for a top four accountancy practice. She is now divorced and has a 12-year-old son, Harry, who is dependent on her. In her City days her previous firm’s group life assurance scheme provided 3x salary if she died in service, meaning that her family would have received £165,000.
Susan’s business is now producing the income and lifestyle she wants. Her mortgage has been reducing over the last few years although she still has an outstanding liability of £115,000 on a house valued at £350,000. Her current remuneration is made up from a small salary, plus dividends of £70,000 per annum. She commented that she was concerned that, if she were to die, her son would be financially disadvantaged and, that there would also be the issue of the outstanding mortgage. Susan advised that her Will was up to date and, that her brother, Paul, is her Executor and Harry’s guardian until age 21.
I outlined a solution that could be paid for by her Company (similar to her old group life scheme) and known as a Relevant Life Assurance policy. These very under-used plans are a tax efficient way for a Company to provide death in service benefits for employees, including directors. As directors are also classed as employees, they can potentially reduce substantially the net cost of their own personal life assurance for family and mortgage protection, that many will often just be paying from taxed income.
A Relevant Life Assurance policy must be arranged on a single life basis and, once in place, Susan’s Company could then pay the premiums direct to the insurer for her. The premiums would be classed as a business expense, so not only could it gain full relief from corporation tax on these, they are also not classed a P11D item for Susan either. This would mean that there is no income tax for her to pay nor, National Insurance for either the Business or Susan herself.
In the event of a claim, the proceeds from the plan would be paid into a Trust and, subject to the agreement of the Trustees, the Executor of her estate, Paul, would be able to ensure that the monies are used for the benefit of her son, Harry. As the plan is written in a Trust, in the event of a claim, the proceeds are outside her estate for Probate purposes, as well as any potential inheritance tax liability. There should also be speedy settlement with the monies being paid very quickly after death.
I recommended that a sum assured of £745,000 would be appropriate for Susan’s circumstances, with this being £115,000 to repay her mortgage plus a lump sum of £630,000 to help with Harry’s financial needs until he is 21. The cost to her Company was £63 per month compared to a total cost of more than £120 per month if a person was to pay this from income that had suffered income tax plus both Employee’s and Employer’s National Insurance. A saving of almost 50%.
Susan was delighted with my recommendation and, is now bringing this important and tax efficient way of providing financial protection to the attention of many of clients attention.
Richmond House Corporate Services Limited offer business owners a comprehensive range of different solutions to protect their families, their businesses and their employees.
This information is provided strictly for general consideration only. No action must be taken or refrained from based on its contents alone. Accordingly, no responsibility can be assumed for any loss occasioned about the content hereof and any such action or inaction. Professional advice is necessary for every case
Nigel Taylor Cert PFS, Dip FA
Financial Planner