CII R05 Business Protection 2

Question 1

What is the primary objective of shareholder protection insurance?

Accepted Answer

To ensure surviving shareholders can buy a deceased shareholder's shares and retain control of the business

Answer

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?

Accepted Answer

Each shareholder owns a policy on their own life written in trust for the other shareholders

Answer

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?

Accepted Answer

A cross-option agreement avoids triggering the loss of Business Property Relief on the deceased's share

Answer

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?

Accepted Answer

As a taxable trading receipt subject to corporation tax

Answer

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?

Accepted Answer

A sole trader who employs staff but has no PAYE income themselves

Answer

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.

CII R05 Practice Test

CII R05 Practice Test

CII R05 Business Protection 2