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Four business protection myths busted

Paul McDowell, 21 January 2020

Business protection provides crucial security for your employer clients, but it isn’t always in place correctly, and some believe they may not need it at all. Zurich’s Paul McDowell sets the record straight…

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Myth #1: Sole traders don't need business protection

Whilst this might be the case for true ‘one-man band’ businesses, there are plenty of sole proprietors who employ people. What if one of their key employees fell ill or died? Just like any other business, there is a need to cover the financial risk of losing them.

However, with sole traders, the knock-on effects are likely to have a more significant impact on the owner’s ability to pay their mortgage and to maintain their lifestyle. Maybe sole traders have a greater need than people think.

But what if the owner dies? How would creditors be paid off, or overdrafts repaid? How would leases on premises and the landlords be dealt with? These are just some of the questions worth considering with clients.

Most sole proprietors don’t have any life or critical illness cover in place that addresses these needs, so they will have to be met from any family protection policies that may be in place – impacting their dependents.

For more, see our content on Business protection: Do sole traders need it?

Myth #2: Relevant Life policies are business protection policies

The protection industry has marketed 'relevant life' firmly in the business protection category, for convenience as much as anything else.

Whilst it’s true that the employer sets them up and pays the premiums, the one entity that remains ineligible to receive any benefits from the policy is the employer. Thus, relevant life policies don’t ensure the survival of the business.

The relevant life trust is a discretionary trust which lists spouses/civil partners and dependent children as the automatic beneficiaries. Some may argue that you can include the other business owners as potential beneficiaries. However, this runs the risk that the trustees may exercise their discretion in favour of dependent family members first; leaving the business owners with nothing – clearly not an effective way of protecting their business.

For more on this, see our content on Business protection: Is a relevant life policy sufficient?

Myth #3: Writing to HMRC explaining the purpose of the policy ensures its tax treatment

No matter how politely you put it, HMRC are highly unlikely to agree the future tax treatment of any event that may or may not happen in the future.

Therefore, the tax treatment of the policy proceeds can’t be guaranteed in advance.

Take a look at our content on writing to HMRC for a lot more on this.

Myth #4: If you don’t claim tax relief on the premiums, you won’t be taxed on the sum assured

I remember being told this many times – and reading about it in some insurers' guides – but it simply isn’t the case. So here are three simple rules that will help work out what is and isn’t possible...

1) If the life assured owns more than 5% of the company shares, then the premiums do not qualify as a tax deductible expense in any event; regardless of the term of the policy or the risk that it is designed to cover.

2) If the policy is being set up to cover a capital risk (such as a loan) then the premiums don’t qualify for tax relief; regardless of whether the life assured owns any of the business or is simply a key employee. (However, if the proceeds are actually used to repay the loan, they should be treated as a capital receipt and shouldn’t affect the profit and loss account. Thus they won’t incur an immediate corporation tax liability.)

3) If the policy proceeds are used to replace lost profits, they will be treated as a trading receipt and will be taken into account when calculating the company’s taxable profits in that year.

Read more about tax relief on premiums

Find out more about Zurich business protection