Accounting of Keyman Insurance
With keyman insurance, there are stiff regulations as to how premiums and benefits are taxed.
As far as premiums, the policy premiums paid by the business can be classified as deductible expenses for purposes of tax relief if three conditions are met:
1. The only relationship of the key person to the business is that of employee / employer.
2. The policy is for compensation of loss of profit
3. The term of the policy is five years or less (but renewal policies are usually acceptable).
If the key person is a partner, there will likely not be tax relief on premiums, because it is not strictly and employee / employer relationship. Additionally, if the reason for the policy is not solely to make up for loss of profit, the premiums will not be tax deductible. This is the case when: the policy has an investment instrument built in, rather than being a strict term life policy; the person insured owns more than 5% of the shares in the company; the policy is bought to underwrite a business loan; or if the policy has the option of conversion to another kind of policy, such as from term assurance to whole of life, or to renew coverage. Accounting of shareholder protection must take into account whether the premiums are being taxed.
Typically, if tax relief is allowed on the premiums, then payouts from the policy will be taxable as a trading receipt. If relief from taxes on premiums is not allowed, proceeds will be taxed as capital receipt and taxed under the 1988 Income and Corporation Taxes Act, Chapter II Part XIII when a "chargeable event" occurs. A chargeable event happens on death, but not on a claim of critical illness. If the policy results in a chargeable gain, which is figured as the policy's surrender value before death, minus premiums paid to date, there will be a tax liability. Surplus is added to the company's profit and taxed as such.
If the business chooses to forgo premium tax relief to try to avoid taxation of proceeds, they may not receive that relief, because the decision on whether premiums are taxed is made by the local tax inspector, who can rule on premium tax status, even if no claim for premium tax relief is made. Problems can arise if the policy is bought on the understanding that the proceeds will be tax free. Later, the proceeds could turn out to be taxed if, for example, the local tax inspector rules that the premiums should have been tax deductible.
Because of this possibility, businesses taking out keyman insurance must meet with the local tax inspector to confirm the tax status of premiums and benefits before purchasing a policy. Accounting of keyman insurance surrender value must take into account the possibility that the proceeds from the policy could be taxed, and the policy value raised accordingly. It is also important to note that because the object of the policy is to pay a lump sum to the business if the insured key person dies, the policy should not be written in trust.
As far as premiums, the policy premiums paid by the business can be classified as deductible expenses for purposes of tax relief if three conditions are met:
1. The only relationship of the key person to the business is that of employee / employer.
2. The policy is for compensation of loss of profit
3. The term of the policy is five years or less (but renewal policies are usually acceptable).
If the key person is a partner, there will likely not be tax relief on premiums, because it is not strictly and employee / employer relationship. Additionally, if the reason for the policy is not solely to make up for loss of profit, the premiums will not be tax deductible. This is the case when: the policy has an investment instrument built in, rather than being a strict term life policy; the person insured owns more than 5% of the shares in the company; the policy is bought to underwrite a business loan; or if the policy has the option of conversion to another kind of policy, such as from term assurance to whole of life, or to renew coverage. Accounting of shareholder protection must take into account whether the premiums are being taxed.
Typically, if tax relief is allowed on the premiums, then payouts from the policy will be taxable as a trading receipt. If relief from taxes on premiums is not allowed, proceeds will be taxed as capital receipt and taxed under the 1988 Income and Corporation Taxes Act, Chapter II Part XIII when a "chargeable event" occurs. A chargeable event happens on death, but not on a claim of critical illness. If the policy results in a chargeable gain, which is figured as the policy's surrender value before death, minus premiums paid to date, there will be a tax liability. Surplus is added to the company's profit and taxed as such.
If the business chooses to forgo premium tax relief to try to avoid taxation of proceeds, they may not receive that relief, because the decision on whether premiums are taxed is made by the local tax inspector, who can rule on premium tax status, even if no claim for premium tax relief is made. Problems can arise if the policy is bought on the understanding that the proceeds will be tax free. Later, the proceeds could turn out to be taxed if, for example, the local tax inspector rules that the premiums should have been tax deductible.
Because of this possibility, businesses taking out keyman insurance must meet with the local tax inspector to confirm the tax status of premiums and benefits before purchasing a policy. Accounting of keyman insurance surrender value must take into account the possibility that the proceeds from the policy could be taxed, and the policy value raised accordingly. It is also important to note that because the object of the policy is to pay a lump sum to the business if the insured key person dies, the policy should not be written in trust.
Taxation of Shareholder Protection
Shareholder protection is also a concern of many small or medium businesses, particularly with regards to tax rates of shareholder protection. Shareholder protection gives remaining shareholders money with which to buy back the deceased's shares in the company, so as to continue running the business as the remaining partners wish. Keyman insurance is designed to compensate a company in the event of the unexpected death of a key person in the business, such as a founder, major shareholder, or partner. Keyman insurance allows owners of small and medium businesses peace of mind at a fairly low cost, and usually a medical exam isn't needed. In some cases keyman insurance proceeds are used to buy back shares of a company after one of the shareholders dies, though companies may use it for other purposes, such as hiring and training a replacement, or replacing cash flow while the company adjusts to its new status.
But keyman insurance isn't the only form of shareholder protection available to small businesses. If a major shareholder dies, their shares could pass on to relatives of the deceased, along with that portion of control of the business. Furthermore, the inheriting shareholders could sell their shares to a third party the business may not want to associate with.
Shareholder protection is a way of making sure the business stays with the shareholders that remain, and there are a number of options of how to do this. Done correctly, shareholder protection results in the deceased person's beneficiaries getting their inheritance as quickly as possible, while minimizing the disruption done to the company in which they held shares.
Shareholder protection is achieved with various keyman insurance policies. Accounting of shareholder protection depends on how a keyman policy is being used. For example, a partner could take out a life insurance policy on herself for a term up to retirement for the value of her shares and have it held it under the business trust so that other shareholders might benefit. However, an existing policy should not be assigned into the trust because it would result in making the policy second-hand, causing proceeds of a claim to be liable for capital gains taxes.
With regard to taxation of shareholder protection tax relief, the UK main rate of corporate tax is 21% for companies with taxable profit up to £1.5 million, and 28% for companies with taxable profit of more than £1.5 million. Profits are taxed depending on the bracket the company falls into. Therefore, a company with taxable profits of £250,000 would pay tax at 21%, and the rate would slide for profits from £300,000 to £1.5 million. If there is no tax relief available on the shares re-purchased with a shareholder relief method, it will be taxed at the appropriate rate.
Concerning taxation of shareholder protection tax relief depends on many factors. A shareholder agreement may require that remaining partners have to purchase shares back after the insured person's death. If that person has shares in an alternative investment market (AIM) or an unquoted trading company and has had those shares for at least two years, the shares may qualify for 100% relief for business property.
for more info about key man Insurance Taxation you can visit
KeymanQuote at http://www.keymanquote.co.uk/
But keyman insurance isn't the only form of shareholder protection available to small businesses. If a major shareholder dies, their shares could pass on to relatives of the deceased, along with that portion of control of the business. Furthermore, the inheriting shareholders could sell their shares to a third party the business may not want to associate with.
Shareholder protection is a way of making sure the business stays with the shareholders that remain, and there are a number of options of how to do this. Done correctly, shareholder protection results in the deceased person's beneficiaries getting their inheritance as quickly as possible, while minimizing the disruption done to the company in which they held shares.
Shareholder protection is achieved with various keyman insurance policies. Accounting of shareholder protection depends on how a keyman policy is being used. For example, a partner could take out a life insurance policy on herself for a term up to retirement for the value of her shares and have it held it under the business trust so that other shareholders might benefit. However, an existing policy should not be assigned into the trust because it would result in making the policy second-hand, causing proceeds of a claim to be liable for capital gains taxes.
With regard to taxation of shareholder protection tax relief, the UK main rate of corporate tax is 21% for companies with taxable profit up to £1.5 million, and 28% for companies with taxable profit of more than £1.5 million. Profits are taxed depending on the bracket the company falls into. Therefore, a company with taxable profits of £250,000 would pay tax at 21%, and the rate would slide for profits from £300,000 to £1.5 million. If there is no tax relief available on the shares re-purchased with a shareholder relief method, it will be taxed at the appropriate rate.
Concerning taxation of shareholder protection tax relief depends on many factors. A shareholder agreement may require that remaining partners have to purchase shares back after the insured person's death. If that person has shares in an alternative investment market (AIM) or an unquoted trading company and has had those shares for at least two years, the shares may qualify for 100% relief for business property.
for more info about key man Insurance Taxation you can visit
KeymanQuote at http://www.keymanquote.co.uk/