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On the early death of a shareholder or partner, their share of the business, for example, company shares or their interests in the value of a partnership, normally forms part of their estate and passes to their beneficiaries.

In the case of a controlling partner or shareholder, this situation could mean the direction and running of the business be dictated by people not previously associated with it, for example the spouse or child(ren) of the deceased shareholder, who may well not have the requisite skills or may be at variance of opinions with the remaining shareholders/partners. This situation is very common, but can be appeased by utilising Shareholder Protection.


To prevent the above situation happening, a legal agreement is put in place which gives the remaining partners or shareholders the right to purchase the shares - the Shareholder/Partnership Protection benefit provides the funds to execute the agreement.


There are, in fact, a number of common solutions.


Own Life in Trust

Each shareholder or partner can take out a life policy on their own life for the value of their share of the business, and the policy is held in a Business Trust for the benefit of the other shareholders or partners. If one of them dies (or is diagnosed with a critical illness), the others remaining receive the benefit through the Trust enabling them to buy the shares.


Life of Another

In cases where there are only two or three shareholders or partners, each takes out a series of policies on each of the others’ lives for the value of their shares in the business. If one of them dies (or is diagnosed with a critical illness), the pay-out is used to purchase the deceased’s share.  A business trust is not required, but this method is not suitable for businesses with more than a few shareholders or partners because the number of individual policies required would likely be too complex.


Joint Life, First Event Policies

 A less common approach is to use 'joint life, first event' policies. For example, in a business with three shareholders or partners, each would take out a joint life policy on the lives of the other two, and the policy would pay out on the first death (or perhaps the diagnosis of a critical illness). This may be more cost-effective as fewer polices are required to be written.


Cross Option Agreements

Alongside the Shareholder Agreement, another legal document, known as a Cross Option Agreement, should always be drawn up to facilitate the purchase of the share in the business of the deceased individual. This usually takes one of two forms depending on the type of benefit:


Death Benefits

A Double Option Agreement obliges the deceased shareholder’s beneficiaries to sell their shares to the other shareholders if they want to buy them, and it obliges the other shareholders to buy the shares if the beneficiaries want to sell them.


Critical Illness Benefits

A Single Option Agreement would be utilised for any critical illness benefits. A critically ill shareholder may not want to relinquish their shareholding, so the agreement gives them the right to sell but does not give the other shareholders the right to buy.

Premium Equalisation

If equal shares are held by a number of partners, one might expect them to share the total premium cost equally too. But this presupposes that they are of a similar age and state of health, thereby attracting similar premium levels. This, of course, is rarely the case. Accordingly, HMRC requires that Premium Equalisation be arranged to ensure that each individual is contributing in line with the potential benefit they will receive, we will fully calculate this on your behalf. 


Our specialist advisors will guide you through the entire process ensuring all agreements and processes are completed to maximise your protection providing peace of mind for the future of your business.

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