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  • No Builds: Introduce self and set time parameters for the presentation. Good afternoon, My name is Simon Wilkins Protection Proposition Manager with Zurich and I would like to spend the next 50 minutes or so talking with you about a possible opportunity for you all in 2011 namely Business Protection and in the interests of the time of year I have some traditional favourites to talk to you about, much like your good old Fererro Rochets, after eight dinner mints and then some new opportunities much like the must have pressie for the current year. So whether you are a traditionalist or on the cutting edge I should have something for you otherwise this could be a long 50 minutes or so!!! But before I start I just want to remind you why protection in general is so important to your clients, you and of course us as a provider. Next Slide: How will it all end?
  • Heading Only: Many successful protection advisers will tell you that protection is sold not bought, as most clients either think it won’t happen to them or more worryingly that they don’t need cover and that they are adequately provided for. Part of my role involves considering the chances of certain events killing us off or critically impacting on our health. This can get a bit morbid, but recently I came across some very thought provoking stats which were also picked up in a recent Mail on Sunday Supplement article, headed ‘How will it all end’ Build 1: They key message in this article is that every day events in our lives carry risk and we are not invincible by any means, therefore if we do not consider these risks as consumers we could be the architect of our own financial disaster. The question then is shouldn’t we do something about it!! So, here you go, some facts and figures to share with your clients, what are the chances of dying from: Build 2: Ignition of nightwear - 1 in 258,326 chance , you have to ask what on earth were they doing!! Build 3: In the bath tub - 1in 35,904 chance - don’t tell your children this one otherwise you’ll will never get them to have a bath Build 4: Falling out of bed – 1 in 8,073 I am willing to bet the chances rocket, for falling in to the wrong bed!! Build 5: Keep an eye on where and what you eat because – Food poisoning - 1 in 1,550 chance Build 6: And when you seek medical attention for your food poisoning, Medical error – accounts for 1 in 207 chance Seriously, many clients have difficulty in appreciating every day events can have devastating impacts on their and their families lives let alone their businesses and the lives of their employees. So, lets take a look at the opportunities you have to discuss business protection and perhaps prevent making the unthinkable even worse for one of your clients. Next Slide: Agenda
  • Verbalise Agenda: Build One : Why Business protection Build Two : Where is the Business Market today? Build Three :Traditional Opportunities (your ferrero rochets!) Business Liabilities Keyperson Protection Shareholder and Partnership protection Build Four : Your new opportunities ( the cutting edge new toy everyone must have!!) Spousal by-pass trust Relevant life policy trust Redundancy cover (key person) Next Slide: Why Business Protection? C:\\Documents and Settings\\chy5484\\Local Settings\\Application Data\\Office\\Macros\\Ppt_ci\\Templates\\Pres_blue_on_white.pot
  • In terms of the why ?, this table helps to demonstrate that there is a clear need for protection as the likelihood of a partner or director dying before the age of 65 can be quite high … … particularly where there are 5 or more partners/directors and rising quite sharply when there is 10 or more involved ! Next Slide: How will it all end?
  • No Builds: Quite simply there is a massive level of need and therefore massive level of opportunity. In April 2010, there were over 2.6 million registered companies in the UK* Business Protection gap defined as £1.1 trillion by Legal & General** Corporate debt gap £300bn Shareholder protection gap £400bn Key person protection gap £400bn** 45% of business owners said their businesses would fold within 12 months of the death or critical illness of a key person** Only 4% of business owners have shareholder protection in place** * www.companieshouse.gov.uk ** www.legalandgeneralcomms.co.uk/businessprotection/the_benefits.html But what could this mean for you if you aren’t already maximising your opportunity in this market? Next Slide: Why Business protection adviser opportunity/benefits
  • Build One: A new income stream, therefore diversifying your business in to an area which lends itself to fee charging but with products that will be able to offer adviser commission post RDR if that is important to you. Build Two: Business protection cases often involve higher sums assured, with higher premiums and therefore higher remuneration to the adviser if they want to take all of the higher commission. And of course, the premiums may be coming from the corporate cheque book so whilst not an open cheque book it is often easier to get commitment from the client. Build Three: Business protection solutions tend to involve multiple sales again providing effective remuneration for the adviser as well as providing the appropriate solution for the client. Build Four: And of course these business meetings tend to be held during the day leaving the evenings available for mortgage or other client meetings or perhaps even a bit of studying!! Lets now look at some of the traditional opportunities available to you. Next Slide: Traditional Opportunities header slide.
  • No Builds: We will take a look at the opportunities and risks that businesses take if they do not consider the following areas of business financial planning: Business Liabilities Key person Protection Shareholder and Partnership protection Next Slide: Business liabilities.
  • So far we’ve seen that a business can have many different liabilities: bank loans, loan accounts, overdrafts, other credit facilities and redundancy liabilities. A business owner’s death or diagnosis of a critical illness could have a major impact on a businesses ability to meet these obligations. Why take the risk when the solution is simple and cost effective? Builds automatically: For example, if the business is a limited company like ABC limited with a £200,000 liability, they could take out a plan owned by the business on Director A’s life for £200,000. On his death or critical illness ABC limited get £200,000 to repay that liability. Next Slide: Example LBD Ltd
  • C:\\Documents and Settings\\chy5484\\Local Settings\\Application Data\\Office\\Macros\\Ppt_ci\\Templates\\Pres_blue_on_white.pot Who can give me a definition of a key person? For those of you that are involved in this market and ask this question what responses do you typically get? Build One: While the key people in a business will often be the Managing Director or other directors, this won’t always be the case. Potentially anyone inside that business could be key to its success due to their knowledge, experience, relationships or contacts. If they are not there, is there an impact on profits, the company’s turnover, or is there an increase in costs? If there is, they may be key. Next Slide: Who are the key people? diagram
  • C:\\Documents and Settings\\chy5484\\Local Settings\\Application Data\\Office\\Macros\\Ppt_ci\\Templates\\Pres_blue_on_white.pot How do you think a business might use the funds from key person protection? Build One: In essence a key person plan replaces profit which is lost when a key individual has died or suffered a critical illness. It can also contribute to the costs of recruitment and training. Cash flow is supported as there is money to pay staff, bills and liabilities, ensuring the business does not face any cash-flow problems. If a business doesn’t make as much profit as it once did, it is potentially not worth as much, by protecting profits business owners are also protecting the value of their investment. Build Two: Essentially, key person protection buys the business time and space to re-organise. If a business is not running smoothly after the death or critical illness of a key person, staff motivation may suffer or they may seek employment else where. If there are cash flow issues creditors may start paying more attention to the business - will the bank look to recall or reduce facilities? Can they get credit terms from their suppliers? These issues can be avoided by protecting the businesses profits. Build Three: Try not to talk about Key person cover when first talking to clients about this concept, try risk mitigation and disaster recovery cash flow management. It will mean more to them!! Next Slide: Key persons Solutions diagram slide.
  • So far we’ve seen that a business can have many different liabilities: bank loans, loan accounts, overdrafts, other credit facilities and redundancy liabilities. A business owner’s death or diagnosis of a critical illness could have a major impact on a businesses ability to meet these obligations. Why take the risk when the solution is simple and cost effective? Builds automatically: For example, if the business is a limited company like ABC limited with a £200,000 liability, they could take out a plan owned by the business on Director A’s life for £200,000. On his death or critical illness ABC limited get £200,000 to repay that liability. Next Slide: Example LBD Ltd
  • As an example, let’s look at a business owned by three shareholding directors with no business succession plans in place. Build One: If owner A died, his shares in the business would pass to his estate – Build Two: this could be his spouse or even his children. This can cause numerous issues for all involved. Build Three: From the perspective of A’s beneficiaries, at a difficult and emotional time they may find themselves owning shares in a company they know nothing about. At the same time they may also have lost A’s income. If they want to sell the shares, who will buy them? The remaining owners aren’t obliged to, and even if they wanted to they may not have the cash. If they do find a buyer, how will they ensure they get a fair price? Build Four: From the perspective of the remaining owners, they may not want new, possibly inexperienced people coming into the business. This may in their eyes cause interference and loss of control but if they don’t have the funds or the right to buy these shares they can do very little about it. Appropriate planning can avoid all of these issues by putting in place the necessary agreements and funds. How many company owners are already part of your client bank? Have they discussed these issues with you? Next Slide: The Company Will.
  • Once the business has understood the protection need, you will of course have to recommend an appropriate solution. The owners will need to plan for each owner’s death and/or the diagnosis of a critical illness. There are several solutions such as life of another, buy and sell agreements/cross option agreements and company share purchase . Here we’re going to focus on option agreements, which is one of the most commonly used solutions. Build One: One solution for business owners is to take out a life plan and put it in trust for the remaining owners, this gives them the cash to buy the deceased or critically ill owner’s share of the business. Each business owner puts in place a plan, in trust for the other owners. Build Two: They then complete an appropriate agreement, that gives them the right to buy and sell the shares should the unthinkable happen. Next Slide: How it works ABC Ltd
  • No Builds: The first opportunity is the Spousal by – pass trust used in the business protection market. This is a great way to add value to clients who run their own businesses and who have IHT issues that you may be advising on. For those of you specialising in Investment and IHT planning this may interest you. Next Slide: How it works – ABC Ltd with NO spousal by-pass in place.
  • Build One: Director A dies after taking a life plan out and placing it in trust for his co directors. Build Two: Director A in this case is a he and his shares pass to his spouse Mrs. A Build Three: Meanwhile, the surviving co- directors claim on the life plan and the claim proceeds are paid to the trustees. Build Four: Under the terms of the cross option agreement: MRS A CAN FORCE B & C TO BUY THE SHARES OR B & C CAN FORCE MRS A TO SELLTHE SHARES Build Five and Six: The trustees ( the co-owners) release the claim proceeds to the beneficiaries who are the co-owners, who in this case then buy the shares. So, where does that leave us? Next Slide: What happens next?
  • No Builds: Spouse has cash instead of shares Although Business Property Relief (BPR) was granted on A’s death, their spouse now has cash in their estate. This is now subject to normal IHT rules. Worst case scenario, nil rate bands have been used and on the spouse’s subsequent death an IHT charge of 40% Spousal by-pass trust can avoid the cash going into the spouse estate and a subsequent (IHT) liability. Next Slide: How it works with a spousal by-pass trust.
  • Build One: Director A dies after taking a life plan out and placing it in trust for his co directors. Build Two: Director A in this case is a he and his shares pass to his spouse Mrs. A Build Three: Meanwhile, the surviving co- directors claim on the life plan and the claim proceeds are paid to the trustees. Build Four: Under the terms of the cross option agreement: MRS A CAN FORCE B & C TO BUY THE SHARES OR B & C CAN FORCE MRS A TO SELLTHE SHARES Build Five and Six: The trustees ( the co-owners) release the claim proceeds to the beneficiaries who are the co-owners, who in this case then buy the shares. So, where does that leave us? Next Slide: What happens next?
  • No Builds: Now the cash is in the By-pass trust not the spouse’s estate The Trust can lend the spouse cash, this then becomes a debt to the spouse’s estate and will have to be repaid on their subsequent death. On the spouse death and settlement of any debts the funds are usually paid the beneficiaries Next Slide: Spousal by-pass trust set up
  • No Builds: A life plan is taken out under a flexible business trust, in-conjunction with a cross option agreement, separately a spousal by-pass trust is set up with a nominal value, for example pinning a £10 note to the trust to create the value. Then you ensure that a will or codicil to a will leaves the business shares to the spousal by-pass trust. It’s as simple as that but don’t worry on doing your first case our consultants or one of our protection specialists can help you. Next Slide: Example for LBD Ltd
  • No Builds: There are only two providers in the market place that can offer you and your clients what I am a about to show you and only one that has passed the approach being adopted via legal council and that is Zurich. Next Slide: The legislation.
  • No Builds: Essentially to quote a well known hair product advert here’s the science bit!! Section 393 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA) which defines a relevant life policy in subsection 393(B)(4) Sets out the criteria which is summarised in these slides. Section 482 IITOIA 2005 States that tax avoidance must not be the main purpose of this arrangement. The Zurich Relevant Life Policy Trust satisfies all of the relevant legislation and the trust has received independent opinion by counsel (QC) Next Slide: What is a Relevant life policy.
  • Build One : A single life policy, taken out on the life of an employee*, by an employer to provide death in service benefits. Build Two: Provides death in service benefits : for individual members over and above that of the main scheme. where the number of employees is too low for a group scheme. In a tax efficient way, compared to directors paying for benefits personally. * Directors can also be employees, partners and sole traders can not. Next Slide: How does it work
  • No Builds: So how does it work? The plan must be, single life only, life only (including terminal illness) Not include Waiver, Critical Illness or PPB end before age 75 Trust must be received pre-issue Where financial underwriting required the following limits apply Up to age 40, 20 times Salary and benefits age 40 – 59 , 15 times Salary and benefits age 60 and above 10 times Salary and benefits Next Slide: What are the benefits of a Relevant life trust
  • No Builds: And here’s why it might be interesting to you and your clients. Does not form part of an individual’s life time allowance Does not form part of an individual’s annual allowance Treated as a business expense (allowable deduction) Not treated as a benefit in kind Not assessable for NI (Employer or Employee) Benefits pay free of Income Tax Next Slide: And in Practice,……… LBD Ltd Company Example
  • No Builds: If a Ali Ramat a share holding Director currently pays £200 per month for his life assurance out of his higher rate taxed and NIC’d income the true cost of the £200 per month cover is £338.98 per month. The cost to the company LBD Ltd of paying this salary is £382.37 per month Fortunately, the gross salary and national insurance are allowable deductions against corporation tax which for a small company is likely to be at a rate of 21%. This means the total cost to both Ali and LBD Ltd is going to be £302.07 per month. Next Slide: But if you use a relevant life trust….. Example Continued.
  • Build One: Again you see the £200 per month premium but this time there is: No employee Income Tax or National Insurance No Employer National insurance And the cost of Relevant life policy is an allowable deduction against corporation tax at 21% Build Two: This means the cost to the company of providing the same cover is £158 per month a massive saving of 47% Now that has got to be of interest to the right client. For details of how to write this business and the other new additions to our trust and options range you only have to visit www.zurichintermediarygroup.co.uk Next Slide: New Opportunities – Redundancy cover.

Zurich Zurich Presentation Transcript

  • Business protection masterclass David Butler Protection Proposition Manager For intermediary use only – not for use with your clients An opportunity for 2011
  • How will it all end? “ When you’ve got to go, you’ve got to go… but will it be by falling off a ladder, falling out of bed – or simply walking down the street?” * *Mail on Sunday 07.03.2010 1 in 258,326 Ignition of nightwear 1 in 35,904 In the bath tub 1 in 8,073 Falling out of bed 1 in 1,550 Food poisoning 1 in 207 Medical error
  • Agenda Why business protection?
    • Traditional opportunities
    • Business liabilities
    • Keyperson protection
    • Shareholder and Partnership protection
    • New opportunities
    • Spousal by-pass trust
    • Relevant life policy trust
  • Likelihood of partner/director dying before 65 Average age of partner/director Source: based on Office of National Statistics Interim Life Tables for UK Males between 2005 and 2007 Number of partners/directors 2 3 4 5 10 30 28% 39% 49% 57% 81% 35 28% 38% 48% 55% 80% 40 27% 37% 46% 54% 79% 45 25% 35% 44% 51% 76% 50 23% 32% 40% 47% 72%
  • The business protection gap Business Opportunities There are 2.6 million registered companies in the UK* Fill the gap The business protection gap is estimated at £1.1trillion** *Source: www.companieshouse.gov.uk ** www.legalandgeneralcomms.co.uk
  • A new Income stream Multiple plans per company Higher sums assured Meetings during business hours
  • Traditional opportunites
    • Business liabilities
    • Keyperson protection
    • Shareholder and Partnership protection
  • Business liability solutions ABC Ltd Director A £200,000 death or CIC £200,000 liability Life of another plan Director A dies £200,000 plan proceeds
  • Key person protection?
    • Anyone whose loss, either permanent or temporary , would affect the company’s ability to maintain turnover and generate profits.
    2/9/2009
  • Key person protection
    • Provides funds to:
    • Underpin profits
    • Enables business to recruit and train a replacement
    • Support cash flow
    • Maintain value of business/shareholding
    Risk and cash flow
    • Provides time and space to re-organise
    • Decreases unwanted attention from creditors
  • ‘ Key person’ solutions ABC Ltd Director A £200,000 death or CIC Life of another plan Director A dies £200,000 plan proceeds
  • The issue
    • Problems for owner A’s beneficiaries:
    • Own a share of a company they may know nothing about
    • Loss of owner A’s income
    • No buyer for shares
    • If buyer found, at what price?
    • Problems for owners B and C
    • New shareholder(s) could cause unwanted interference
    • Loss of control
    • Cannot afford to buy shares from beneficiaries
    Owner C Owner A Owner B Owner C Spouse A Owner B Owner C Owner B Ch ren ild A dies or even Traditional opportunities
  • Solution Double Option Agreement A POLICY IN TRUST Surviving Owners B and C B POLICY IN TRUST Surviving Owners A and C C POLICY IN TRUST Surviving Owners A and B
  • Spousal by-pass trust
  • How it works ABC Ltd no Spousal by-pass A A dies SHARES Mrs A Life Plan in trust Mrs A can force B&C to buy the shares or B&C can force Trusts to sell the shares Claim monies paid to trustees Trustees pay cash to B&C B&C buy the shares
  • What happens next?
    • Spouse has cash instead of shares
    • Although Business Property Relief (BPR) was granted on A’s death, their spouse now has cash in their estate. This is now subject to normal IHT rules.
    • Worst case scenario, nil rate bands have been used and on the spouse’s subsequent death an IHT charge of 40%
    • Spousal by-pass trust can avoid the cash going into the spouse estate and a subsequent (IHT) liability.
  • How it works – ABC Ltd Spousal by-pass A A dies SHARES Spousal by-pass trust Life Plan in trust pays to B&C Trust can force B&C to buy shares or B&C can force trust to sell the shares Claim monies paid to trustees Trustees pay cash to B&C B&C buy the shares
  • Spousal by-pass
    • Now the cash is in the by-pass trust not the spouse’s estate
    • The trust can lend the spouse cash, this then becomes a debt to the spouse’s estate and will have to be repaid on their subsequent death.
    • On the spouse death and settlement of any debts the funds are usually paid to the beneficiaries
  • Spousal by-pass set up
    • Plan Spousal by-pass trust
    Life plan Flexible business trust Double option agreement Trust set up with Nominal value (£10) Will or codicil written To leave shares to Spousal by-pass trust Will or Codicil
  • Relevant Life Policy Trust
  • The legislation
    • Section 393 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA) which defines a relevant life policy in subsection 393(B)(4)
      • Sets out the criteria which is summarised in these slides.
    • Section 482 IITOIA 2005
      • States that tax avoidance must not be the main purpose of this arrangement.
    • The Zurich Relevant Life Policy Trust satisfies all of the relevant legislation and the trust has received independent opinion by counsel (QC)
  • What is a relevant life policy?
    • A single life policy, taken out on the life of an employee*, by an employer to provide death in service benefits.
    • Provides death in service benefits:
      • for individual members over and above that of the main scheme.
      • where the number of employees is too low for a group scheme.
      • in a tax efficient way, compared to directors paying for benefits personally.
      • * Directors can also be employees, partners and sole traders can not.
  • How does it work?
    • Plan must:
    • be single life
    • life only (including terminal illness)
    • not include Waiver, Critical Illness or PPB
    • end before age 75
    • Trust must be received pre-issue
    • Where financial underwriting is required the following limits apply:
      • Up to age 40 20 times salary and benefits
      • Age 40 to 59 15 times salary and benefits
      • Age 60 and above 10 times salary and benefits
  • Benefits of a relevant life policy
    • Does not form part of an individual’s life time allowance
    • Does not form part of an individual’s annual allowance
    • Treated as a business expense (allowable deduction)
    • Not treated as a benefit in kind
    • Not assessable for NI (employer or employee)
    • Benefits paid free of Income Tax
  • Example: Cost to Ali as a Director paying personally Monthly premium = £200.00 Pre-tax Income to fund £200 at Income Tax rate of 40%* and National Insurance at 1%* = £338.98 Cost with employers National Insurance Contributions at 12.8% on this salary = £382.37 Gross Salary and National Insurance are allowable deductions against Corporation Tax at 21%* Total monthly cost to Ali and LBD Ltd Company = £302.07 Ali Ramat a shareholding director currently pays £200 a month for his life assurance. Figures based on HMRC Tax and NI rates applicable as at 01.12.2010
  • Example: continued Cost to Ali and LBD Ltd company paying personally = £302.07 Cost to LBD Ltd Company paying through RLPT = £158.00 Saving = £ 144.07 or over 47% Figures based on HMRC Tax and NI rates applicable as at 01.12.2010 LBD Ltd pays premiums through a relevant life plan Monthly premium = £200.00 No employee Income Tax or National Insurance No employer National Insurance Relevant life policy is an allowable deduction against corporation tax at 21%* Total Cost to LBD Ltd Company = £158.00
  • Thank you for listening Important information The tax and legislation information contained in this document is based on Zurich Intermediary Group current understanding as at December 2010 and may change in the future. HM Revenue and Customs (HMRC) practice, and the laws relating to taxation, are complex and subject to individual circumstances and changes which cannot be foreseen. The value of any investment and the income from it can fall as well as rise as a result of market and currency fluctuations and your client may not get back the amount originally invested. Zurich Assurance Ltd, authorised and regulated by the Financial Services Authority, for its life assurance, pension and investment products. Registered in England and Wales under company number 02456671. R egistered Office: UK Life Centre, Station Road, Swindon, SN1 1EL. For use by professional financial advisers only. This advertisement has not been approved for use with clients.