The Unexpected Event
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Published: 9 May 2019
A very sad and unexpected event
Although this is a fictitious story, there are many companies that could find themselves in this unexpected scenario.
Imagine a company with three working directors who are all shareholders. They were running a successful business, making a consistent level of profits to cover their lifestyles and retain sufficient reserves to cover normal commercial risks.
Sadly, one of the directors had a fatal heart attack. Fortunately, there was in place a company insurance policy that would pay the salary of the replacement of a key member of staff.
An oversight
Unfortunately, the amount due to the estate of the deceased director, and therefore his widow, for his shareholding in the company had been overlooked.
This meant that a valuation of the shareholding at the date of death was needed and the two remaining directors needed to find sufficient funds to pay for the deceased director’s shares.
Shareholder Protection Policy
If a shareholder protection policy or a life of another policy had been taken out by all three directors from incorporation, or such date it was thought to be necessary, sufficient funds should have been available to the two remaining directors to purchase the deceased director’s shareholding.
After an initial valuation of the company, it is only necessary to review it each year. Although the insurance premiums, if paid by the company, are treated as a taxable benefit in kind, the insurance proceeds received by the remaining directors are tax free.
The moral of the story
The greater the value of the shares, the greater is the risk of not insuring against such a sad and unexpected event.
At Sundial Tax & Finance Ltd, we can assess for you how great a risk that can be. For further advice on this matter you can contact David Cane on 07749 080 806 or email him at [email protected]
