| Why would you need it? | The arrangement is personal, and the policy is owned by the company directors who must pay the premiums. If the company pays the premium there will be a benefit in kind on the premiums paid. | This is an arrangement between the company and one or more of its shareholders, whereby the company enters into a legal agreement with each shareholder to be included so that in the event of their death the company would have an option to buy back the shares from the deceased’s personal representatives at a fair open market value. Likewise the deceased’s personal representatives or the deceased’s next of kin would also acquire an option to compel the company to purchase the shares from them. The company pays the premium on each policy. |
| What are the requirements to set up the policy? | There are two steps involved: 1. Create a Buy and Sell Agreement. A Buy/Sell Agreement places an obligation on: (a) The personal representatives of the deceased’s estate to sell, and (b) The surviving directors of the business to buy the shareholding at a price, which is calculated in accordance with the terms of the agreement. 2. Set up the policies either as “Own life in Trust” or “Life of Another” (a) “Own life in Trust” On this plan basis, each of the directors takes out a life policy on his/her own life under trust for a sum assured equal to the value of his/her share of the business. Trust form can be found here. (b) Life of Another basis; on this plan basis, each director takes out a life insurance policy on the life of each of the other directors for a specified sum assured. It is intended that this will enable the purchase of the appropriate portion of the deceased’s shareholding in the event of any of their deaths. The application form is found here. | There are two steps involved: 1. The legal agreement. 2. The Life assurance policy. The Legal Agreement They will need to do the following: 1. Check the company’s constitution to see if they allow the company to buy back its own shares. Amend them if necessary in order to proceed. 2. Confirm Capital Gains Tax Treatment. 3. Prepare a Buy Back Agreement. 4. Have a meeting of the Board to approve the entering into the agreements by the company and the shareholders & pass a Special Resolution. A sample Company Secretarial Documentation Booklet can be found here. The Life Assurance policy 1. The company should propose for a policy on the life of each shareholder to be included in the arrangement to ensure that it has the funds to meet its obligations under the Buy Back Agreement. The application form is found here. |
| How much cover is needed? | If “Own life in Trust” each of the directors takes out a life policy on his/her own life under trust for a sum assured equal to the value of his/her share of the business. If “Life of Another” each of the directors take out a policy on the life of the other directors for a sum assured equal to the estimated current value of the shareholding. Financial underwriting questionnaire to be sent in with the application form if the sum assured is above €1.5m. This will also be required if the cumulative figure of all the policies that the company is submitting is over €1.5m. | The sum assured would normally be equal to the estimated market value of that individual’s shareholding. Financial underwriting questionnaire to be sent in with the application form if the sum assured is above €1.5m. This will also be required if the cumulative figure of all the policies that the company is submitting is over €1.5m. |
| Who pays the premium? | The premiums are paid by the individual shareholders out of after tax income. If the company funds a “personal arrangement” the cost is treated as benefit in kind for each shareholder. | The premium is paid by the company and not the shareholders personally. |
| Are premiums tax deductible? | No, the premiums do not qualify for tax relief. | Premiums paid by the company for company buy back insurance will, under current Revenue practice, not be an allowable deduction for corporation tax purposes. |
| Are the proceeds taxable? | This depends on how they are set up. 1. If set up as Life of Another, on death the proceeds of the plan are paid to the plan owner. The proceeds are not liable to capital gains tax and there is currently no inheritance tax liability for the surviving shareholder provided they have paid the premium for the benefit they will receive. 2. If set up as Own Life in Trust, on death the proceeds of plan payable on death are not liable to capital gains tax under current legislation. On death the proceeds of the plan are paid to the trustee(s) of the policy for the benefit of the surviving shareholders who are party to the arrangement and as such the Revenue Commissioners have clarified that the proceeds of such a plan are exempt from inheritance tax in the hands of the surviving shareholders in certain circumstances, to the extent that they use the proceeds to purchase the deceased’s shareholding. | As the policies on the lives of the shareholders are pure protection policies with no surrender value or market value, the proceeds payable on death would not be subject to the exit tax applied to the proceeds of life assurance policies. No capital gains tax will arise on payment of the proceeds of the policy. If the buy back of the shares is deemed to be a distribution (see the following paragraph), then the company would be obliged to deduct dividend withholding tax at standard rate on the payment. For corporate shareholders policy the following rules must be met so that the sale of the shares back to the company by the deceased estate are not liable to income tax under Schedule F on the amount of the distribution plus attaching tax credit: 1. Company must not be quoted on the stock exchange. 2. The vendor of the shares must be resident in the ROI. 3. The vendor must own the shares for 3 years. 4. The purchase of the shares must be for the benefit of the company’s trade. 5. After buyback the vendor must not own more than 30% of the company i.e. spouse & children. 6. The vendor must reduce their shareholding by at least 25%, as a result of the purchase. 7. Purchase does not form part of scheme/arrangement to extract profits without taking a dividend. |
