Why is it important to ensure the commerciality of a shareholder protection arrangement?04 December 2014
It’s important that a shareholder protection arrangement is viewed as commercial where trusts are being used. There are various reasons for this:
- If the arrangement is commercial then the payment of the premiums to maintain the policy won’t be regarded as gifts, instead they’ll be exempt transfers under S10 IHTA 84. The settlor is generally a beneficiary under a business trust, so that the policy can potentially be assigned to them for example, if they no longer own an interest in the business. It’s important that the arrangement is commercial to ensure that the premiums aren’t regarded as gifts and therefore that the gift with reservation of benefit provisions aren’t invoked.
- As the business owners are creating trusts simultaneously, it’s important again that the arrangement is viewed as commercial to avoid the associated operations rules being invoked.
There are numerous ways to help to protect the commerciality of the arrangement, such as:
- Equalising the premiums
- Ensuring that the beneficiaries under the trust are restricted to business owners and that no one is getting something for nothing under the arrangement (ie only those business owners who have put similar cover in force under trust are able to benefit under the arrangement)
- Ensuring that the level of cover is appropriate ie if they’re over insured this could be deemed to be providing the business owners with gratuitous benefit or, in other words, something for nothing