Have you ever considered what happens if one of your business partners falls seriously ill or dies unexpectedly? Their shareholding in the company will normally pass to their partner or children. This means you either end up with uninformed shareholders suddenly having a say in the business…or, you will need to buy them out.

According to a recent survey by Legal & General and unbiased.co.uk, some 45% of UK business owners expect the remaining owners to buy their shares in the event of their death. This is usually the best solution for the family, but it is not always that simple.

The same survey revealed that almost 40% of businesses do not have any financial protection to cover the cost of purchasing the deceased’s shares. The survey estimates that this represents a share protection gap of some £683 billion leaving 1 million UK businesses at serious financial risk.

The solution is a product known as Shareholder Protection Insurance. This ensures that in the event that a co-owner of a business dies or becomes ill, funds are made available to ensure the remaining owners can buy those shares at a fair value based on a professional valuation.

It is a simple product that need not be that costly. There can also be some tax benefits. If the company pays the premiums, these will often qualify for tax relief as part of a director’s salary package.

It terms of inheritance tax if the arrangements between the co-partners or co-shareholders are established on a true commercial basis, the premiums paid are not gifts or transfers of value, proceeds from the policy will probably not be subject to inheritance tax.

With research suggesting that almost a third of SME owners have no legal instructions in place to indicate how they would like their shares dealt with upon their death, it is a product well worth discussing in the next board meeting.

As ever, the key thing is to get the right advice.