Life of Another
Each shareholder takes out a policy on the other shareholders' lives. On a shareholder's death, the surviving shareholders receive the policy proceeds to fund the share purchase.
Shareholder protection ensures the surviving shareholders in your business have the funds to purchase shares from a deceased or critically ill shareholder's estate, preventing unwanted third parties from acquiring a stake in your business.
Important: The tax treatment of shareholder protection depends on how policies are structured and individual circumstances. Always seek independent advice from a qualified tax consultant and your solicitor before proceeding.
The consequences of a shareholder's death without protection in place can be severe, both for the surviving shareholders and for the deceased's family.
On death, a shareholder's shares typically pass to their estate and then to their beneficiaries under the will or intestacy rules. The beneficiaries may have no connection to or interest in the business.
The deceased's family may become shareholders with voting rights. They may want to sell their shares to an outside party, or may attempt to influence the business, creating conflict and disruption.
Even if the family agrees to sell, the surviving shareholders may not have sufficient personal funds to buy the shares at fair value, potentially forcing a sale to an unknown third party.
Uncertainty over ownership can damage customer and supplier confidence, destabilise management, and in the worst cases threaten the viability of the business during a vulnerable period.
Shareholder protection insurance is most effective when combined with a cross-option agreement, a legal document that gives both parties a right, but not an obligation, to buy or sell the shares.
A legal agreement between shareholders that gives the estate a "put option" to sell the deceased's shares, and gives the surviving shareholders a "call option" to buy them, both exercisable within a defined window.
When the option is exercised, the insurance provides the funds for the purchase. The estate receives fair value for the shares, and the surviving shareholders retain full ownership without outside interference.
A cross-option agreement, as opposed to a binding buy-sell agreement, is structured to preserve business property relief for inheritance tax purposes. This is an important reason to use this structure rather than a mandatory purchase agreement. Legal advice is essential.
The agreement should specify how the shares are to be valued, typically by an independent accountant using an agreed formula. This removes uncertainty and potential disputes at an already difficult time.
We work with specialist business protection insurers to structure the right solution for your business.
Each shareholder takes out a policy on the other shareholders' lives. On a shareholder's death, the surviving shareholders receive the policy proceeds to fund the share purchase.
Each shareholder takes out a policy on their own life, written in a discretionary trust for the benefit of the surviving shareholders. A common and tax-efficient structure for many businesses.
The business takes out policies on each shareholder, held in a business trust. The proceeds are used to fund the buyout. Suitable for larger businesses or where the premium payment structure benefits from being company-owned.
Combines shareholder protection insurance with a professionally drafted cross-option agreement and share valuation mechanism. A complete solution for protecting business ownership on death or critical illness.
Equivalent protection for partnerships and LLPs. Ensures surviving partners can buy out a deceased or incapacitated partner's share of the business without disruption or outside interference.
Tailored shareholder protection for limited liability partnership members. Addresses the specific legal structure and capital account arrangements of an LLP.
A shareholders' agreement sets out the rights and obligations of shareholders broadly. Shareholder protection deals specifically with what happens to shares on death or critical illness. Both are advisable. The insurance and cross-option agreement address the financial mechanics of the share transfer; a shareholders' agreement covers the broader governance of the company. A solicitor should draft both documents.
A cross-option agreement gives the estate a "put option" to require the surviving shareholders to buy the deceased's shares, and gives the surviving shareholders a "call option" to require the estate to sell. Both options can be exercised within a defined period. This structure avoids a binding purchase agreement, which could prejudice business property relief, while still ensuring the transaction can occur.
The sum assured is typically based on the current value of each shareholder's stake. The shares should be valued at the time the policy is taken out and reviewed regularly. The cross-option agreement should specify the valuation method to be used when an option is exercised, typically by an independent accountant. Your adviser will help you determine the appropriate sum assured.
Yes. Many shareholder protection arrangements include a critical illness element, allowing the buyout to be triggered if a shareholder suffers a specified serious illness and is unable to continue. This addresses the scenario where a shareholder survives but can no longer participate in the business. The cross-option agreement would need to be drafted to include this trigger event.
A pre-existing condition may result in an exclusion, a loaded premium, or in some cases a decline. However, many applications are still accepted with specific exclusions applied. We work with a range of specialist business protection insurers and can identify those most likely to offer cover at acceptable terms for each shareholder's circumstances.
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