Taxation Implications

The most important point to consider in relation to the taxation of keyman policies is whether the proceeds payable on death will be liable to tax.

 

Policy Proceeds Payable On Death

The purpose of the policy is to protect the company financially in the event of the death of a key person, so the company needs to know, if they effect cover of €100,000, will they actually end up with €100,000 or €100,000 less Corporation tax.

 

The purpose for which the policy is taken out, whether to cover a “Capital” or “Revenue” type loss, is the main consideration in establishing whether or not the proceeds will be taxed.

 

If the purpose of the policy is to protect a company loan then the proceeds are likely to be treated as a Capital receipt for the company. The proceeds of a company owned policy, paid out on death or disablement, are exempt from Capital Gains Tax. So no tax liability arises for the company.

 

If the policy is to protect “loss of profit” (if the profits were earned they would be subject to Corporation Tax) or other “revenue items” such as replacement costs then the proceeds are likely to be treated as a “revenue receipt" and subject to Corporation Tax.

 

Recommendation

Because of the different tax treatment we would recommend that:

• Two separate policies should be taken out where both loan cover (capital) and loss of profit (revenue) cover are required.
• The company should pass a board resolution stating the purpose for which the policy, or each policy, is being taken out.

 

Tax deduction for premiums

Generally speaking Keyman Insurance premiums are 'not' admissible deductions for Corporation Tax purposes. However the Revenue Commissioners have outlined the circumstances in which such premiums may qualify as admissible deductions:

(a) the sole relationship is that of Employer and Employee,

(b) the employee has no substantial proprietary interest in the business,

(c) the insurance is intended to meet loss of profit resulting from the loss of the services of the employee as distinct from loss of goodwill or other capital loss, and

(d) the policy is a short term insurance, providing only for a sum to be paid in the event of death.

 

Therefore premiums on keyman insurance policies which do not meet all of the above requirements are not admissible deductions for Corporation Tax purposes.

 

On this basis keyman insurance premiums for policies taken out to repay loans or other outstanding debts are not admissible deductions for Corporation Tax purposes.

 

For more information please contact our sales team at 01 4097090 or info@orca.ie

 

Partnership Insurance

The sudden death of a partner in a firm can cause a number of problems for both the surviving partners and the deceased's next of kin.

 

Surviving Partners

The partners may be legally bound, either under their own Partnership Agreement or under the Partnership Act 1890, to pay an immediate capital sum to the deceased partner's estate in respect of:

 

• his share of undrawn profits for the year in which he died.
• his share of any partnership fixed assets, such as the office-building.
• the balance of his capital/loan account.
• a payment in respect of his share of partnership goodwill.

 

The partners could therefore be faced with the prospect of finding an immediate capital sum to meet their obligations to the deceased partner's next of kin. If they do have not sufficient liquid capital available the surviving partners might have to borrow the necessary funds but they would then be faced with the prospect of loan repayments for years to come. If borrowing is not a realistic option at the time the partners might be forced to pay a pension to the deceased partner's dependants. This would be a long term financial drain on the partnership.

Deceased's Next of Kin

For the deceased partner's next of kin a problem that could arise if the surviving partners are not be able to find the necessary capital immediately. Some partnership agreements allow surviving partners to spread payments to a deceased partner's estate over a number of years, up to 10 in some cases. The problem is compounded by the fact that the next of kin can not sell their partnership share to any other third party. They must therefore wait for payment from the surviving partners.

 

The Solution

Partnership Insurance can provide a solution to the problems outlined in Section 2 by providing liquid capital on the death of a partner to enable the surviving partners to make an immediate payment to his estate in respect of his share of the partnership. Partnership Insurance is arranged in two steps:

a) Partnership Agreement.

Most partnerships have a written partnership agreement covering the conduct of the business and the rights and obligations of each partner. This agreement should ideally outline the precise entitlement of each partner's estate in the event of a partner's death.

b) Life Assurance.

The agreement would also normally include an obligation on each partner to effect a life assurance policy on his own life for the benefit of the other partners to provide the necessary funds on death to enable them to make an immediate payment to his estate.

 

Partnership Agreement

The existing partnership agreement may need to be amended, or a separate agreement drafted, to provide for the purchase and sale of a deceased partner's share of the business on death.

 

The agreement can be framed as a Double Option agreement that provides in the event of the death of a partner:

 

• the surviving partner can exercise an option to compel the deceased's personal representatives to sell the deceased share in the firm or
• the deceased's personal representatives can exercise an option to compel the surviving partner to buy the deceased share in the firm at the market value.

If neither side exercise their options then the share is not bought back and go through the deceased's estate to his next of kin.

 

Life Assurance

The life assurance may be set up in one of two ways:

a) Life of Another.

Each partner covered by the Agreement effects an Irish Life Protection Plan on the life of the other partner. The cover on the policy should equal to estimate current value of their share of the partnership. The owner of each policy will pay the premium on the policy.

b) Own Life in Trust.

Each partner covered by the Agreement effects an Irish Life Protection Plan on their own life for a sum assured equal to the estimated current value of their share of  the partnership. Each policy is written under Trust for the benefit of the other partners  covered by the Agreement. Each partner pays the premium on his own policy.

 

The "Life of Another" method is simple. The policy proceeds are free from personal tax under current legislation, as the beneficiary will have paid the policy premiums. This method can be cumbersome where there are more than two partners involved, and is inflexible if circumstances change e.g. if a partner leaves the firm or a new partner joins.

 

The "Own life in trust" method is flexible, as beneficiaries can change if the agreement ceases. The policy proceeds will be exempt from tax in the hands of the surviving shareholders provided certain Revenue conditions are met.

The decision as to which method to choose will vary from one firm to another. In most cases we would recommend that policy be arranged on an own life in trust basis.

 

 

PARTNERSHIP PROTECTION INSURANCE PROVIDES THE NECESSARY FUNDS TO PROTECT BOTH SIDES IN THE EVENT OF A PARTNER'S DEATH:

• THE SURVIVING PARTNER RETAIN CONTROL BY BUYING BACK THE DECEASED'S SHARE IN THE FIRM, and
• THE DECEASED'S NEXT OF KIN ARE ABLE TO TURN THE DECEASED'S SHARE IMMEDIATELY INTO CASH AT A FAIR PRICE.

 

 

For more information please contact our sales team at 01 4097090 or info@orca.ie