Business succession - how to protect your business on the death of a director

If a director/shareholder of a small company dies, this can cause considerable problems. It can, for instance, result in disruption and unwanted interference in the business of the deceased shareholder from beneficiaries who have no real business experience.

In these circumstances, it is absolutely vital that the remaining shareholder or shareholders should have enough funds to buy out the shares of the deceased director/shareholder and that at the same time they should have the right to buy the shares from the estate of the person who died.

It is also necessary to ensure for the benefit of the deceased’s estate that business property relief, which is an extremely important form of Inheritance Tax relief, is preserved for the family of the deceased as it can save the estate from massive Inheritance Tax.

A cross option agreement together with an appropriate term life assurance policy can be the answer to these problems.

What is a cross option agreement?

With a cross option agreement which is appropriately drafted, each shareholder enters into the agreement which provides that on the death of one of the shareholders the remaining shareholder or shareholders have the option to buy the deceased’s share. The same agreement should also give the estate of the deceased shareholder the right to require the surviving shareholder or shareholders to buy the shares of the deceased shareholder. There must be no binding contract as such as this can cause business relief, where it is available, to be lost. At the same time that the shareholders enter into the agreement, they also take out life policies on each other’s life which become payable on the death of the deceased’s shareholder and can be used by the surviving shareholders to purchase the deceased shareholder’s interest in the company.

It is crucial that the cross option agreement is properly worded so that business property relief is not lost. In these circumstances, it would be prudent to seek advice from a specialist commercial solicitor who deals in cross option agreements and at the same time see a solicitor who specialises in wills and Inheritance Tax to ensure proper estate planning is in place.

For advice on Inheritance Tax, business protection or any other legal requirements please call for a no obligation consultation on 0113 320 5000.