Why would I want to protect my key staff?
Often a person's value to the business is reflected in their remuneration package, but whatever their function or responsibility their loss could have disastrous consequences for the business. Some of these may include:
- Loss of profits
- The need to recruit or train a replacement
- Loss of important personal or business contacts
- Difficulties in meeting existing loan repayments
- Loss of confidence from suppliers and customers
- Difficulties in raising finance for new developments
- Loss of detailed knowledge of the businesses processes and systems
- Having to repay a loan the key person has made to the business
- Loss of goodwill
How to calculate a key member of staff worth
There are no hard and fast rules when assessing the financial value of a key person. Each key person must be considered on their own merits.
There are several options available to help you assess a reasonable amount of cover, and these are outlined below.
Multiple of profits
As one of the main objectives of key person cover is to protect the profitability of the business, looking at profit is a sensible first step.
The normal multiples would be as follows, although you might want to use higher multiples for a rapidly expanding business:
- 2 x gross profit, or
- 5 x net profit.
These would be the upper limits on the business as a whole. So where there's more than one key person, you would need to apportion cover according to each person's contribution.
Multiple of salary
A multiple of gross salary, including benefits in kind can give a useful guide to the amount needed to recruit a replacement.
Between 7 and 10 x gross salary is a useful guide for non-shareholding employees, but you need to take care with shareholders who may be taking a reduced salary to build the business or taking dividends for tax reasons.
The taxation implications for a company depend on the solution, the type of plan chosen, the reason for the cover and the relationship between the key person and the company. However, HM Revenue and Customs will treat each case on its own merits and may take a different approach to that outlined below.
Contact the firm's local inspector of taxes to find out the approach they will take. You can find a draft letter to HM Revenue and Customs.
Life Of Another
There are 4 tests to see if a premium is a tax-deductible expense for the company. These are:
- The purpose of the plan is to solely protect against loss of profit.
- The sole relationship should be employer/employee (although very small shareholdings - e.g. under employee share schemes - are likely to be ignored).
- The plan must be a short-term assurance, which is normally understood to mean a non-convertible term insurance plan no more than 5 years.
- If the plan fails any of these tests the premium is unlikely to be tax deductible. For example, a plan taken out to provide security for a loan wouldn't meet the requirement to protect solely against loss of profit. So, premiums are not normally allowable for corporation tax relief and the sum assured is not normally regarded as a trading receipt.
Take Our Advice
With years of experience there's nothing we don't know about business protection, talk to us and we can give you sound advice on what type of cover is best for your business and how much.
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