Cross option agreements: Protection for you, your family and your business
Starting and growing a business can be an exciting yet very busy time for business owners. So much so that it is possible to overlook the importance of putting plans in place to ensure the business is protected in the worst should happen and a shareholder dies.
This article outlines how we can help you to ensure that when the unexpected occurs, there is minimal disruption to your business and it can continue to run smoothly in the hands of those who understand it best.
What is a cross option agreement and how can it provide peace of mind?
Cross options give the surviving shareholders of a private limited company the right to purchase the shares of a deceased shareholder. Further, they also give the personal representatives of the deceased shareholder’s estate the ability to force the surviving shareholders to buy those shares. This dual mechanism enables the surviving shareholders to retain control of the business and avoid financial problems whilst also protecting the beneficiaries of the deceased’s estate by ensuring they receive what the shares are worth.
Insurance for cross option agreements
It is important for the shareholders to have shareholder life insurance in place which will ensure that they have funds available to purchase the deceased’s shares. These policies are often written into trust which ensures that there is cash available for the surviving shareholders to purchase the shares, therefore avoiding financial difficulties at what will already be a stressful time.
Why is having a cross option agreement important?
In the absence of a cross option agreement, shareholder agreement or provision within the articles of association dealing with the death of a shareholder, the business interests of a shareholder will pass in accordance with the terms of their Will or in the absence of a Will, the rules of intestacy (a set of rules set out by law setting out who will inherit). It is quite possible that the beneficiaries who could be the deceased shareholder’s family members may not have any interest or the necessary skills or experience to run the business creating difficulties for all parties involved.
Why is having a Will important?
To avoid ambiguity, it is important to have a Will in place which works in conjunction with the cross-option arrangements. Having a Will in place also enables you to make it clear who you wish to benefit from the other (non-business) assets in your estate – which may be different from those you have chosen to benefit from the sale of your shares when you die.
To read more about our Wills service click here.
Business Property Relief and Inheritance Tax
Many businesses qualify for an Inheritance Tax relief known as Business Property Relief. It is essential that the cross option agreement is very carefully drafted to ensure that the deceased’s shares still meet the criteria to qualify for business property relief so that Inheritance Tax benefits are maintained. Failure to do so could cause Inheritance Tax to become due on business assets.
It is therefore critical to obtain specialist tax advice to ensure that the agreement and associated insurance policies do not trigger any unwanted tax liabilities.
How we can help
Our commercial solicitor Max Tebbitts and private client solicitor Paul Clark work collaboratively to provide integrated legal advice for business owners through their respective specialisms in business and personal legal matters. We work closely with other advisors such as financial advisors and accountants, and we can recommend advisors to provide further specialist advice.
Click here to contact Max and Paul for a free initial conversation or to book an appointment. We offer appointments at our office, your office, your home and remotely via Microsoft Teams.
This article is for information only and does not constitute legal advice. Cross option agreements may not always be suitable and so legal advice must be sought to fit your specific situation.
