No one likes to think about a co-shareholder dying or becoming critically ill. But if it happens and you have not planned for it, the consequences for the business can be severe:

• A new “partner” you never chose. Their shares pass under their Will to a spouse or relative who may have no interest in, or knowledge of, the business — but who now has a say in how it is run.
• No money to buy them out. Even if you want to buy the shares back, you and the company may simply not have the cash to do it.
• A family left waiting. Your late partner’s family may be left holding shares they cannot easily sell, with no fair price and no certainty.
• An avoidable tax bill. A badly drafted arrangement can mean the shares lose valuable inheritance tax relief.

The solution: a cross option agreement

A cross option agreement is a simple but powerful succession tool. If a shareholder dies or becomes critically ill:

• The surviving shareholders get the option to buy that shareholder’s shares.
• The deceased shareholder’s estate gets the option to sell them.

Either side can trigger the sale — so the business stays in the right hands and the family receives fair value.

Backed by insurance, a cross option agreement pays for itself

A cross option agreement is usually paired with life insurance, either with each shareholder insuring the lives of the others, or with the company insuring all of its shareholders. This is typically arranged by an independent financial adviser, and we are happy to work alongside yours. When the worst happens, the policy pays out and the money is there to buy the shares.

What you gain from a cross option agreement

• Continuity of control: the surviving owners keep running the business, free from outside interference.
• A fair deal for the family: the estate receives a fair price, often linked to the insurance payout, and gets cash rather than shares it cannot sell.
• Tax efficiency: a properly drafted agreement will usually preserve Business Property Relief (BPR), an inheritance tax relief available on qualifying business shares.
• Peace of mind: fewer disputes, more certainty, and a secure long-term future for the business.

Beware of the “binding contract” trap

This is where do-it-yourself and poorly drafted arrangements come unstuck. If your agreement — or your company’s articles of association — says the shares must be bought back on death or critical illness, HMRC can treat that as a binding contract for sale, and BPR will generally be lost. The fix lies in the drafting: structured as options rather than obligations, HMRC accepts that the arrangement is not a binding contract and the relief is protected.

That is why your cross option agreement must be drafted to achieve both your commercial and tax objectives — and checked against your articles and any shareholders’ agreement so that all three work together.

Plan now, protect everyone

At Kitson Boyce, our Business Team prepares cross option agreements that protect your business, your fellow shareholders and your family. Whether you are putting one in place for the first time or want an existing arrangement reviewed, now is the time to act.

Talk to us today. Contact Corri Pedrick, Head of our Business Team, on 01803 202043 or at [email protected].