Directors Share Protection and Cross Option Agreements

Published / Last Updated on 21/03/2024

What would happen to your business if you or your co-business owner(s) died today?

Would the sign over the door be:  Welcome to the offices of “I Messed It Up Limited” whose shareholders are now 50% in my name and 50% in the names of my recently deceased co-director’s spouse, son, daughter, and Rex their pet dog.

Would you really want your business to go this way?  It may do if you have not made a 'business Will' via Directors Share Life Insurance and Cross Option Agreement.

  • Would your co-owner really want their loved ones to be ‘lumbered’ with the business interest and be involved in the business? 
  • Do they have the skills? 
  • Do they have the knowledge?
  • Would they prefer to have the cash value of the business rather than the actual business itself?
  • Would the business survive and thrive with the loss of one of the key owner/directors?

If you have answered no to any of these questions, then you need a “Business Will” using Directors Life Insurance Protection and a Cross Option Agreement.

Stage 1 – Leave Shares On Death to your Loved Ones To Get Business Property Relief

A trading business interest is not subject to inheritance tax on death using business property relief.  Therefore, when you die and leave an interest in a trading business to your loved ones, it is not subject to inheritance tax.

Stage 2 – Life Insurance

Establish Life Insurance to the value/sum of your shares/interests in the limited company.  On death, the sum assured should be paid out to your surviving business owner/directors in trust (if you are paying the premiums) or directly to them (if they are paying the premiums for your life insurance).

Stage 3 – Directors Share Agreement

A directors share agreement should be established as to what happens to the shares of a director on death.

  • The agreement may be a simple one, i.e., the director leaves their shares to fellow directors on death, but this means loved ones may be ‘left short’ financially if they lose the value of the business as you left it to fellow business owners.
  • Our preferred option is a ‘Cross Option Agreement’.  This is a business succession agreement that the shares/business interests are left in your Will to your loved ones (no IHT due to Business Property Relief).  The agreement then gives the option of loved ones that inherited the business interest to sell these to remaining directors/owners and gives the surviving director/owners the first option to buy the shares now owned by the deceased’s loved ones.  The Life Insurance fund paid to surviving directors is used to buy back the business shares/interests.  This way, the surviving director/owners continue to run and own the business and loved ones get a cash value on sale to the surviving director/owners (bought with the proceeds from the life insurance policy).

You then have the peace of mind that your family will be able to sell your share of the business to the other shareholders at the price agreed between you.  Your family is then financially provided for.  Likewise, the surviving shareholder(s) have the security of knowing that they have the right to buy the deceased shareholders share - his/her family cannot refuse to sell it to remaining directors.  Care must be taken when choosing the wording of the agreement and you should contact us for formal advice.

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