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Is Shareholder Protection Insurance Tax Deductible?

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If you’re looking into the different types of shareholder protection policies to figure out which one best suits you, you may also be wondering whether the insurance premiums are tax deductible. 

Before we answer that question, let’s first understand what shareholder protection insurance is.

What is shareholder protection insurance?

Shareholder protection insurance is designed to protect a business and its shareholders in the event that a shareholder falls critically ill or passes away. The insurance payout would enable surviving shareholders to buy back the shares of their late business partner, ensure a fair payout and minimise disruption to the business. 

To learn more about shareholder protection, take a look at our article ‘How Does Shareholder Protection Work?’.

Tax implications of purchasing shareholder protection

There are various ways to purchase shareholder protection and each option comes with its own tax implications: 

  • Life of another – each individual shareholder pays the insurance premiums on the lives of their fellow shareholders.
  • Company share purchase arrangement – the company takes out a policy on the life of each shareholder and pays the premiums.
  • Own life policy under business trust – each shareholder takes out a plan on their own life for the value of their shares and writes this policy into a business trust. With this type of policy shareholders typically pay the premiums themselves.

The potential tax implications to consider when purchasing shareholder protection include:

  • Income tax and national insurance
  • Corporation tax
  • Inheritance tax

These tax considerations are linked to both the premiums and the insurance payout. This article considers the tax relief on premiums only, not the potential tax implications of receiving an insurance payout.

Do shareholder insurance premiums qualify for tax relief?

If the policy has been taken out by the company and the business is responsible for paying the insurance premiums then yes, the premiums qualify as a business expense for taxation purposes. The business would be able to claim tax relief on both corporation tax and national insurance.

However, HMRC considers premiums paid for by the business as a benefit in kind for its shareholders. This means that the shareholders who are covered by the policy would be liable to pay income tax and national insurance on the premiums.

What happens if shareholders pay the insurance premiums?

If individual shareholders are paying the insurance premiums themselves then the policy would not be considered a benefit in kind. However, this also means that the business would not be able to claim tax relief on the premiums.

Next steps…

Shareholder protection is a valuable safeguard that helps businesses to protect their futures. Speak to one of our specialist advisers at SN Financial to learn more about taking out the right policy to suit your specific needs.

Taxation rules can change at any time and are dependent on individual circumstances.

Speak with an accountant to learn more about tax relief on insurance premiums. 

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