Shareholder protection
Life cover plus a cross-option agreement, so if a shareholder dies the survivors have the money to buy the shares and the family has a willing buyer at a fair price.
When a shareholder dies, their shares usually pass to their family. The surviving shareholders can end up in business with a grieving spouse who needs income, not equity, and the family can end up holding shares nobody will buy. Shareholder protection solves both problems: life cover (often with critical illness) on each shareholder provides the purchase money, and a cross-option agreement gives each side the right to force the sale at an agreed valuation basis. We arrange the cover and work alongside your accountant and solicitor on the agreement.
Who this is for
- You co-own a limited company and have never discussed what happens to the shares if one of you dies.
- Your shareholders' agreement is silent on death, or pre-dates the current valuation of the business.
- You would not want to be in business with a co-shareholder's family, and would not want your own family stuck holding unsellable shares.
- A lender or investor has asked to see succession arrangements as part of due diligence.
The problem shareholder protection solves
Without an arrangement in place, a deceased shareholder's equity passes under their will. The survivors may lack the cash to buy the shares even if the family wants to sell, and the family may inherit a minority stake with no dividends and no market. Shareholder protection puts money and mechanism in place at the same time: a policy per shareholder sized to the value of their stake, and a legal agreement that governs the sale.
The cross-option agreement
The standard mechanism is a cross-option agreement (also called a double option agreement). On death, the surviving shareholders have an option to buy the shares, and the estate has an option to sell. If either side exercises its option, the other must complete. Because neither side is under a binding obligation to sell before death, the arrangement is generally structured to preserve entitlement to inheritance tax business relief, which a binding sale contract would typically put at risk. Business relief rules have been subject to recent and planned change, so specialist tax advice on the agreement is essential. For critical illness cover a single option agreement is usually used instead, so a seriously ill shareholder can choose to sell but cannot be forced out.
Common policy structures
The most common structure is "own life under business trust": each shareholder takes a policy on their own life, written into a trust for the benefit of the other shareholders. Alternatives include life-of-another policies (workable for two-shareholder companies) and company share purchase, where the company itself buys back the shares, which carries its own company-law and tax conditions. We recommend a structure based on the number of shareholders, the shareholdings and the advice of your accountant.
Premium equalisation and fairness
An older shareholder with a large stake costs more to insure than a younger one with a small stake, yet each is buying protection for the others. Premium equalisation rebalances who pays what so the arrangement stays commercial rather than gratuitous, which matters for the tax analysis. It is a spreadsheet exercise we run as part of the set-up, with the final treatment confirmed by your accountant.
Valuation and review
The agreement should record how the shares will be valued: a fixed figure reviewed regularly, or a formula applied at the date of claim. Cover levels should be reviewed against the valuation at least every couple of years and after any funding round, acquisition or change in shareholdings. Out-of-date cover is the most common defect we see in existing arrangements.
How Major Money Matters helps
Specific things we do for this product. No generic platitudes.
Structure before product
Own-life-under-trust, life-of-another or company share purchase. We recommend the structure that fits your shareholder count and stakes, then quote the cover, in that order.
Work alongside your accountant and solicitor
We arrange the policies and trusts and coordinate with your professional advisers on the cross-option agreement, valuation basis and tax treatment.
Premium equalisation calculated for you
We run the equalisation numbers so each shareholder pays a commercially fair share, and document it for your accountant to sign off.
Quoting across a number of insurers on every life
Each shareholder is underwritten individually. We pre-assess health on each life and place each policy with the insurer most likely to underwrite it cleanly.
Frequently asked questions
What is a cross-option agreement?
A legal agreement giving surviving shareholders the option to buy a deceased shareholder's shares, and the estate the option to sell. If either side exercises its option the other must complete. It is drafted by a solicitor; we arrange the insurance that funds it and coordinate the two.
Why not just write a binding "must buy, must sell" agreement?
A binding contract for sale in place at death is generally treated as turning the shares into a right to cash, which typically puts inheritance tax business relief at risk. The cross-option structure achieves the same practical outcome while preserving the relief position. Take specialist tax advice; the rules in this area have been changing.
How much cover does each shareholder need?
Enough for the survivors to buy that shareholder's stake at the agreed valuation basis. In practice that means cover roughly equal to each holding's current value, reviewed regularly. Under-insured arrangements force the survivors to find the shortfall in cash at the worst possible time.
Who pays the premiums?
Either the shareholders personally or the company on their behalf. If the company pays, the premiums are normally treated as remuneration of the shareholder for tax purposes. The right answer depends on your circumstances, so confirm the treatment with your accountant.
Should critical illness be included?
Often, yes. A shareholder forced out of work by serious illness may want to exit, and the others may want a route to buy them out. Critical illness cover funds that, usually paired with a single option agreement so the ill shareholder can choose to sell but cannot be forced to.
We already have policies but no agreement. Is that enough?
No. Insurance without an agreement leaves the survivors with money but no right to buy, and the family with shares but no obligation on anyone to purchase them. The agreement and the cover only work as a pair. We review existing arrangements and flag the gaps.
Related
Other protection products that often pair with this one.
Key person insurance
A lump sum paid to the business if a person it cannot trade without dies or falls seriously ill. Buys time to recruit and replace lost profit.
Read moreBusiness loan protection
Life cover shaped to business borrowing, so debts are cleared rather than called in if the person behind them dies or falls seriously ill.
Read moreRelevant life cover
Company-paid life cover for a director or employee, paid out to their family via trust. Often a tax-efficient swap for personally paid life cover.
Read moreWhat our clients say
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Get your share-purchase arrangement in place
Book a quick 15-minute call with Ollie Allen or one of the Major Money Matters protection team. We will map the shareholdings, outline the structure and quote the cover, then coordinate with your accountant and solicitor.
We aim to return your call as quickly as we can. Mon to Fri 9am to 5pm, weekend appointments on request.