This provides an agreement between shareholding directors or partners in a business, supported by life assurance to ensure that there are sufficient funds for the survivor to purchase the shares. It is designed to ensure that the control of the business is retained by the remaining partners or directors, but the value of the deceased’s interest in the business is passed to their chosen beneficiaries in the most tax-efficient manner possible.
If a shareholding director or partner were to die, the implications for your business could be very serious indeed. Not only would you lose their experience and expertise, but consider, too, what might happen to their shares. The shares might pass to someone who has no knowledge or interest in your business.
Or you may discover that you can’t afford to buy the shareholding. It’s even possible that the person to whom the shares are passed then becomes a majority shareholder and so is in a position to sell the company.
The shareholding directors or partners in a business enter into an agreement that does not create a legally binding obligation on either party to buy or sell the shares but rather gives both parties an option to buy or sell, i.e., the survivor has the option to buy the shares of the deceased shareholder, and the executors of the deceased shareholder have the option to sell those shares. In either case, it is the exercise of the option that creates a binding contract; there is no binding contract beforehand. This type of agreement is generally called a ‘cross option’ agreement.
This is also known as the ‘double option’ or ‘put and call’ agreement. By taking out a cross option agreement, you will determine what will happen to the shares in the business if one of the owners were to die or become critically ill.
It is important that this agreement is not binding regarding sale of the shares, because this will prevent you from claiming relief from Inheritance Tax.
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