Ensuring success: business insurance

14 March 2019

Small business owners can support their future finances by using the business itself as a planning tool

Many business owners are so busy with work they miss opportunities to use those businesses for financial planning. There are 2 powerful, and often overlooked, ways in which a business can be used as such a tool; the business can also be used as the engine room for a family’s finances, and there are ways that this vehicle can be protected.

The first way is contributing to pensions from the firm, which offers many benefits: 

• The pension contributions will be treated as a company expense and subsequently reduce the corporation tax bill.
• It is a tax-efficient way to extract funds from the firm to use for personal benefit.
• By paying into a pension, business owners are creating a separate vehicle to fund their retirement that does not rely solely on the business’s success – especially important in periods of possible uncertainty.
• Unless someone can retire on the grounds of ill health or has been diagnosed with serious ill health – having less than 12 months to live – a pension fund cannot be accessed until the owner is 55 years old.

Depending on the age of the owner now and their intended retirement age, there could potentially be many years for the fund to benefit from compounding growth – that is, growth on the growth of the fund – before withdrawals are made.

If you are a company director or an employee and already pay personally for life assurance, you could save up to 49% by putting your premiums on expenses as well. This means the company pays for the policy and it is fully tax-deductible.

The company takes out the policy on behalf of an employee or director, and in the event of their death a tax-free payment will be made to their designated beneficiaries. This is a specialist form of life assurance known as relevant life cover.

There are a couple of conditions: the policy can only be in place until the person assured reaches the age of 75, and the sum assured must be no more than 30 times salary if the person is under the age of 35, according to recent figures from Aviva.

The benefits of this are as follows: 

• The premiums are not considered a benefit in kind for the employee or director.
• They are also considered a company expense, and so will reduce corporation tax.
• The sum assured is received free of tax.
• The sum assured is paid into a trust that does not create an inheritance tax liability for the estate of the person assured.
• A trust can also be used to preserve the funds for future generations and safeguard against potential claims by third parties.
• The employer premiums will not count towards the annual pension allowance.
• There will be no test against the pension lifetime allowance.
• The policy cannot invalidate enhanced or fixed protection.

As an example of this expense, insurance and pension provider Aegon calculates the cost of a policy taken out by a 40-year-old non-smoker in good health, which would pay out £500,000 on their death, up to the age of 65, at £34.68 per month.

It’s important to insure the people who are crucial to the continuing success of a business

Company directors and employees can also extract funds from the business as salaries and dividends received. These can be used to meet their current costs of living and support their future financial plans.

But in addition, the business may employ other family members, including the children once they have grown up. The long-term strategy may on the other hand be to build up the business and sell it to fund the owner’s retirement or provide an inheritance for their children or grandchildren. Whatever the plan, it is clear that its success is crucial to meeting future financial goals and objectives. It is therefore imperative that the business is protected.

Arguably the most important part of a business is its staff. If a company relies on a single sales rep to bring in all new business, how would the business cope if they were unable to work for 6 months, or even if they were to die unexpectedly? Not only would the company suffer a reduction in turnover but customers may seek to establish new relations with competitors that could further damage the business.

To minimise the impact of this, it’s important to insure the people who are crucial to the continuing success of a business. Businesses already insure buildings, contents and machinery, and these items are much more easily replaced than a key member of staff. If something unexpected were to happen to such a person and they were insured, the business would then receive a cash injection when it is most needed. This could be used to keep the business afloat while new staff members are recruited and trained.

I believe that business owners also tend to overestimate the cost of such insurance. For example, the cost of insuring the death of a non-smoker in good health between the age of 40 and 65 for a sum of £250,000 would be just £19.35 per month, according to the insurer AIG. The cost of the premiums would also be tax-deductible and reduce the company’s corporation tax bill.

Please note: levels and bases of reliefs from taxation are subject to change and their value depends on the individual circumstances of the investor. The value of your investments can fall as well as rise and you may not get back the full amount invested. What you get back at retirement cannot be guaranteed and will depend on how much you pay in, investment performance and interest rates when you retire. Foster Denovo Limited is authorised and regulated by the Financial Conduct Authority (FCA). The FCA does not regulate taxation and trust advice.

Marc Burman is a financial planner and partner at financial advisory firm Foster Denovo

Further information

• This feature is taken from the RICS Property Journal (March/April 2019)
• Related categories: Finance