CII R05 Business Protection 2 — Questions and Answers
Question 1: What is the primary objective of shareholder protection insurance?
- To protect shareholders against falls in the company's share price
- To ensure surviving shareholders can buy a deceased shareholder's shares and retain control of the business (Correct answer)
- To provide dividends to shareholders if the company becomes insolvent
- To cover shareholders against regulatory fines imposed by the FCA
Correct answer: To ensure surviving shareholders can buy a deceased shareholder's shares and retain control of the business
Shareholder protection provides funds so surviving shareholders can purchase a deceased shareholder's interest, preventing unwanted third parties such as the deceased's family from acquiring a stake in the business.
Question 2: To avoid an immediate inheritance tax charge, how is shareholder protection most commonly structured?
- The company owns a single policy covering all shareholders
- Each shareholder owns a policy on their own life written in trust for the other shareholders (Correct answer)
- Each shareholder owns a policy on the life of another shareholder
- All policies are held in a single discretionary will trust
Correct answer: Each shareholder owns a policy on their own life written in trust for the other shareholders
Each shareholder taking out a policy on their own life and placing it in trust for the other shareholders avoids the gift with reservation rules and prevents an immediate chargeable transfer.
Question 3: What is a key advantage of using a cross-option agreement rather than a binding buy and sell agreement for partnership protection?
- A cross-option agreement always produces a higher payout on death
- A cross-option agreement avoids triggering the loss of Business Property Relief on the deceased's share (Correct answer)
- A cross-option agreement removes the need for life assurance policies
- A cross-option agreement guarantees a fixed sale price for the partnership share
Correct answer: A cross-option agreement avoids triggering the loss of Business Property Relief on the deceased's share
Because a cross-option agreement creates options rather than a binding obligation to sell, HMRC is less likely to deny Business Property Relief on the deceased partner's share under s.113 IHTA 1984.
Question 4: If key person insurance premiums are treated as an allowable business expense, how will the claim proceeds generally be treated by HMRC?
- As a capital receipt exempt from corporation tax
- As a taxable trading receipt subject to corporation tax (Correct answer)
- As a tax-free receipt regardless of how premiums were treated
- As a dividend distribution to shareholders
Correct answer: As a taxable trading receipt subject to corporation tax
Where premiums have been allowed as a business expense, HMRC will treat any claim proceeds as a taxable trading receipt, so the business will pay corporation tax on the sum received.
Question 5: Which of the following employees is NOT eligible to be covered under a relevant life policy?
- A company director who is employed under a contract of service
- An employee aged 58 with 20 years of service
- A sole trader who employs staff but has no PAYE income themselves (Correct answer)
- A shareholder-director owning 10% of the company's shares
Correct answer: A sole trader who employs staff but has no PAYE income themselves
A sole trader cannot be covered by a relevant life policy because the policy requires an employer-employee relationship under a contract of service; sole traders are self-employed.
Question 6: How are proceeds from a relevant life policy normally treated for inheritance tax purposes on the death of the employee?
- They form part of the deceased's estate and attract IHT at 40% above the nil-rate band
- They are paid free of IHT because the policy is held in a specific relevant life policy trust (Correct answer)
- They attract a 20% lifetime charge as a chargeable lifetime transfer
- They are subject to IHT only if the sum assured exceeds the employee's pension lifetime allowance
Correct answer: They are paid free of IHT because the policy is held in a specific relevant life policy trust
Because a relevant life policy must be written in a specific trust, the proceeds are paid outside the employee's estate and are therefore free from inheritance tax.
Question 7: What is the maximum sum assured HMRC will normally accept under a relevant life policy without challenge?
- £1 million, regardless of the employee's salary level
- 25 times the employee's total remuneration in the tax year (Correct answer)
- 10 times the employee's basic salary excluding bonuses
- There is no stated maximum; it is left to employer discretion
Correct answer: 25 times the employee's total remuneration in the tax year
HMRC guidance indicates that a sum assured of up to 25 times the employee's total remuneration is generally acceptable for a relevant life policy to qualify for favourable tax treatment.
CII R05 Business Protection 2
What is the primary objective of shareholder protection insurance?