A Masterclass in Cross Option Agreements

The owners of any Limited Company (or partnership) need to consider what should happen if a shareholder or partner falls seriously ill or passes away.

Will the remaining owner or owners agree to buy the deceased’s shares? Can they afford to do so?

Can the family of the deceased owner compel the remaining shareholders to buy their shares?

What would a fair price be for the shares?

Cross-Option Agreements are a vital solution in this situation.

Standard Cross Option Agreements

If a business owner dies, their share will pass to their spouse or beneficiaries via their will (or, of course, on Intestacy). This may result in beneficiaries owning part of a company they may not want to run.

In addition to this, shares in the company are now part of the Beneficiaries’ estates and therefore at risk from Divorce, Remarriage, Bankruptcy and Long Term Care. If the Beneficiaries decide to sell the business, the sale proceeds will enter their estates creating a potential IHT liability on their death.

There are further consequences the Beneficiaries will need to consider when the Family Life Assurance Proceeds are paid, as the proceeds will be in their estates for the calculation of Inheritance Tax. They may also be at risk from Divorce, Remarriage, Bankruptcy and Long Term Care.

What if the remaining Shareholder(s) don’t want to run the company in partnership with the Beneficiaries?

What if the remaining Shareholder(s) don’t have the funds to buy out the share of the business?

The remaining Shareholder could find that they own the entire company after the execution of an ‘Industry Standard’ Cross Option Agreement. This could be at risk of attack should they Divorce, remarry, pass away or go into Long Term Care.

IHT

Whilst trading, Business Relief is applicable. However if the business is sold, the cash proceeds will then be part of the estate on death and so assessable for Inheritance Tax on death.

CGT

On a future sale, the growth in the Shareholder’s holding has increased – hence more CGT will be payable than necessary

Is there a solution?

A Countrywide Cross Option Agreement will ensure that the proceeds of any Life Assurance will be held in the Family Business Trust(s) (Discretionary Trusts) for the Deceased’s Beneficiaries. The Deceased’s share of the business will be held in further Shareholder Trust(s) (Discretionary Trusts). The surviving Director is a Trustee and has full control of the whole business. The Director and their family are Beneficiaries.

Advantages for the Deceased Shareholder’s Beneficiaries

• The cash proceeds from the Life Assurance are now held in the Family Trust, not the Beneficiaries’ estates, which has significant IHT advantages.

• The funds are subject to the maximum possible protection from the risk of claims from Divorce, Remarriage, and Long Term Care.

Advantages for surviving Shareholders

• They still own their shares, and the deceased Shareholder’s percentage is held by Trust, of which they and their family are both Trustees and Beneficiaries.

• On a sale, only the sale proceeds from their own holding will enter their estate and the remaining percentage will be held by a Discretionary Trust. It is therefore out of their estate for the calculation of IHT and subject to the maximum possible protection against third party attacks.

• Dividends paid in respect of the shareholding in the Trust and be distributed to the Beneficiaries of the Trust. The Shareholder Trust can therefore be used as an Income Tax planning tool.

• Significant IHT & CGT Savings can be made.

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This article was submitted to be published by Countrywide Tax & Trust as part of their advertising agreement with Today’s Wills and Probate. The views expressed in this article are those of the submitter and not those of Today’s Wills and Probate.

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