Cross Option Agreements

Take five guide - Cross Option Agreements   

The shareholders of every jointly owned company should consider what they wish to happen to shares in the event of the death of a shareholder.

Often, business partners will want to ensure that shares stay within the existing pool of shareholders, rather than being passed on to the deceased’s beneficiaries or sold to a third party. Cross Option Agreements are an effective way to achieve this.


1. What do Cross Option Agreements do?

Cross Option Agreements are an agreement that after a shareholder’s death, the deceased beneficiaries must offer the shares for sale to the remaining shareholders, or to the company itself. They provide assurance that a deceased shareholders’ family will receive value for the shares, as well as certainty for the surviving shareholders that they won’t end up in business with the beneficiaries of the deceased shareholder’s estate.

2. What do Cross Option Agreements mean for Inheritance Tax?

The agreements can help minimise the liability for Inheritance Tax for the beneficiaries of the shareholder who has died. A legal adviser can write them in a way which protects the Business Property Relief from inheritance tax which, if available, can reduce the value subject to IHT. This requires the use of mechanisms called ‘put’ and ‘call’ options.

3. What are put and call options?

To maintain the availability of Business Property Relief, but to give all parties certainty that the shares can be bought/sold in the way intended, put and call options must be used.

A ‘put’ option allows the deceased shareholders’ personal representatives to require the surviving shareholders (or the company in some circumstances) to buy the shares.

A ‘call’ option requires the personal representatives of the deceased shareholder to sell the shares to the existing shareholders (or the company in some circumstances).

4. What insurances will I need?

Companies will usually want to make sure insurances are in place that pay out upon the death of a shareholder to provide the funds for buying the shares under a Cross Option Agreement. This is known as ‘key person’ or ‘shareholder protection’ insurance and is particularly important in situations where a shareholder is also a director.

It’s worth noting here that key person insurance can also be helpful with other financial pressures that may result from the loss of a shareholder, including the need to hire consultants or others to help keep the company running in the immediate aftermath of their death.

5. How do Cross Option Agreements fit into overall tax planning?

While Cross Option Agreements are effective, they work best as part of an overall tax planning strategy, and it’s important to take a holistic few of the whole business and its liabilities. For more on this, visit the Planning for the Future page of our Life Matters site. <link>

Specialists from the Thrings  Succession and Tax Team can look at the bigger picture and help shareholders identify which reliefs apply to avoid any unintended adverse tax consequences and assist with preparation of tax efficient wills

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