Ask Annie: What cover will I need if I go it alone and lose the safety net?


Q: I have recently left my job as a company director on rather acrimonious grounds, losing the private medical insurance (PMI) that was part of my benefits package. I am considering going into business as a wine importer and wonder what types of insurance I should consider in case I'm injured or fall ill. What are the options for a budding small businessman? I am married and have a three- year-old daughter.

TR, Newcastle

A: Long-term income protection and life insurance are likely to be your most immediate needs, says Kevin Carr of broker Lifesearch. "Individual cover can be arranged to protect the family/mortgage, and separate insurance can be taken to help keep the business afloat."

To safeguard the family in the event of illness or injury, Mr Carr says income protection cover pays a tax-free monthly income until the policyholder returns to work, passes away or reaches retirement age. "It is important to make sure the cover is written on an 'own occupation' basis, which means you are covered if you are unable to do your own job, as opposed to any other job."

Life insurance pays a lump sum, or an income if preferred, in the event of death before a certain age. Mr Carr adds: "This type of cover has never been cheaper than right now and so it is a good time to buy."

As for PMI, you could look at a policy specially designed for the self-employed. For example, Axa's Independent Health Cover pays £1,000 to policyholders who are hospitalised, the idea being that the cash makes up for loss of income.

As your business grows, taking out further insurance is likely to become a must. For example, if you employ someone, you are legally obliged to have employers' liability insurance. You should also consider cover for: buildings and contents; equipment; business continuity; public and product liability; goods in transit; and legal expenses insurance for any contract or employment disputes.

Q: I have a Prudential with-profits bond that I would like to transfer to my 21-year-old son. What are the tax consequences of doing so? Similarly, what would they be if my son subsequently surrendered the bond?

DS, London

A: According to Danny Cox at independent financial adviser Hargreaves Lansdown, there are two potential issues to consider here: inheritance tax (IHT) and income tax.

You should have nothing to worry about with IHT if, on the date of the transfer, the value of the bond is below £3,000. Under IHT rules, you are allowed to give away up to £3,000 in a single tax year.

However, if the bond is worth more than this amount then your gift would be considered a "potentially exempt transfer" – meaning that you must live for seven years for it not to be included in your estate for IHT purposes.

As far as income tax is concerned, no money is payable by you or your son at the time of the transfer. But when your son comes to encash the bond, income tax may be due.

The amount for which your son is liable will depend on his tax status at that time. If he is in the higher-rate bracket, he will have to pay the difference between the lower and the higher rate of tax – 20 per cent from April 2008. However, the longer the bond is held, the greater the tax relief that can be claimed. Go to the HM Revenue & Customs website, www.hmrc.gov.uk, for precise details.

If you need help from our consumer champion, write to Annie Shaw at The Independent on Sunday, Independent House, 191 Marsh Wall, London E14 9RS or email sindie@independent. co.uk. We cannot return documents, give personal replies or guarantee to answer letters. We accept no legal responsibility for advice given.

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