Cross Option Agreements

A Must for every business with Shareholders or Partners.

It’s not something many of us want to think about but the death of a shareholder, especially if he or she is also a Director, can have a major impact on a business that hasn’t planned for such an event.

This will be a testing time for all concerned including the beneficiaries of the deceased’s estate and it has to be appreciated that what is best for them might not be what is best for the business especially if the beneficiaries have no experience within the business.

Planning for this eventuality and having a well drafted Cross Option Agreement in place can not only ensure that both parties needs are met but it can also create a tax efficient environment utilising Business Property Relief.

The basis of a cross option agreement is straight forward; each shareholder agrees that following his or her death, the fellow shareholders will have the option to buy the deceased’s shares (in some cases this could also include those of his or her spouse).

Typically the shares would be made available for purchase at market value (a so-called ‘call option’) and that his or her personal representatives (on death) have the option to sell the shares (and, in some cases, those of his spouse) to the continuing shareholders.

If funding the sale/purchase of the shares is likely to be an issue, the shareholders entering into the Cross Option Agreement will take out a term assurance policy. Any amount that becomes payable under the policy is held in Trust by the remaining Shareholders to pay for the deceased’s shares.

Structuring the transfer of shares in this way, it is possible to make sure that the deceased’s shares qualify for business property relief. In valid circumstances this would currently provide 100% relief from Inheritance Tax.

We understand that for most people their business interests are inextricably linked to their personal and family lives and would therefore always recommend that a Cross Option Agreement should be considered alongside personal Legacy Planning.

As mentioned above, it’s not something any of us really want to think about, but it is something most of us intend to get round to.

Why not let us take it off your ‘To Do’ list?