3. If a business protection policy is owned and paid for by the company and a children’s critical illness claim is made, does the benefit, if successful, have to be paid to the company or can it go straight to the life assured?
If the policy is owned and paid by the employer, it would be the employer who would receive the payment in the event of a claim. It would be up to the company to decide to pay the funds to an individual. If paid to an employee, the claim proceeds would be taxed as income.
These funds could allow the business flexibility, for example allowing an employee time off or a temporary change to their working pattern while continuing to pay their full salary, knowing that the claim proceeds would cover or at least contribute to the cost of the disruption.
4. What happens under a share protection arrangement with a critical illness payout where the ill shareholder returns to work?
The main consideration in this scenario is what the business should do with proceeds from the claim, as they will be sat within the business trust, allowing the owners of the company access to a reserve of capital that could be used in future to buy back the shareholder’s holding within the business at the point in time when they look to sell.
While it could be tempting to give the ill shareholder some or all of the proceeds, the reason the policy was taken out was to make sure the business had the cash available to buy out a shareholder following their death or serious illness.
The ill shareholder might intend to return to work, but consideration needs to be given to what would happen if they suffered a further critical illness. Furthermore, if a life or earlier critical illness policy pays out, it will only pay out once.
So, if a critical illness claim is paid and the shareholder then dies, does the business have the cash readily available to buy the shares back from their estate?
There is one further reason why a business might not want to distribute the proceeds from a critical illness policy when the shares are not being sold and that is because it would result in the proceeds being used for a non-commercial purpose, which could mean IHT implications in the future.
While there are advantages to keeping the claim proceeds in trust, there are some tax considerations to be aware of.
Firstly, the pre-owned asset tax rules could apply if a business trust is used for shareholder protection and sees the settlor as a potential beneficiary as they are a shareholder in the business.
Secondly, business protection policies must use a business trust, and these are discretionary trusts, meaning they fall under the relevant property regime rules for IHT purposes.
