What is co-shareholder protection insurance?

Co-shareholder protection is insurance specifically for directors, partners or shareholders. It aims to protect your business, shareholders and your family in the event of circumstances prohibiting you from working, such as death and illness. It is different to key person insurance which is for someone key to the success of a business but not a director, partner or shareholder. 

Why is it important?

By taking out shareholder insurance, you will be protecting your business, fellow shareholders and your family in a number of ways: 

  • A lump sum payment would provide sufficient funds to buy the relevant shares from your family. 
  • The sale of the shares will provide your family with liquidity and possibly a way of paying any inheritance tax charge. 
  • If the policy and shareholders agreement has been set up correctly, the lump sum should fall outside of your estate for inheritance tax purposes. 
  • You can specify the allocation of shares in the shareholders agreement which can help protect minority shareholders.
  • Correctly attributing the costs and benefits under a shareholder protection arrangement will ensure that the policy premiums and benefits are not subject to inheritance tax.

What happens when a business partner dies?

When a business partner or shareholder dies their shares pass to the beneficiaries of their estate. More often than not this will be one or more family members who may have little or no interest in the future of the business or have an immediate need for cash and wish to sell the shares.

For the surviving shareholders this could mean having to work with new business partners who do not have the same experience or vision for the future direction of the business, whether this is a family member of the deceased or potentially a stranger who has purchased the shareholding from the family.  

It is prudent to discuss these matters with your family and business partners (co-shareholders) as early as possible and establish a plan for the future so that all parties can agree the most desirable outcome and put suitable agreements in place.

What is an option agreement?

An option agreement is a formal arrangement where at least one party has the option, but not right, to take a certain action. For business protection planning purposes, this refers to the option to buy or sell shares or an interest in a business. The main types are single option and cross option.

Single option agreement

Single option agreements are usually set up for critical illness purposes and is usually for the benefit of the shareholder who is critically ill. 

This option provides the shareholder with the option to sell his/her shares to the remaining directors, partners or shareholders without being forced into selling the shareholdings. 

This is an attractive clause to include in the agreement because there is always a possibility that you could make a full recovery and want to return to the business once you return to good health1

Cross option agreement

This is also referred to as a buy and sell agreement or double option agreement. The purpose of this agreement is to give the surviving shareholders the option (but not an obligation) to purchase your shares before they are transferred to a third party. Each shareholding is subject to a “call” option and a “put” option. 

  • A call option gives existing shareholders the right to purchase your shares from your personal representatives (the person/s administering your estate).
  • A put option gives your personal representatives the right to sell your shares to the remaining shareholders.

The wording of a cross option agreement and/or single option agreement is extremely important as you must ensure that it provides each party with a right and not an obligation, otherwise the agreement will be considered a binding contract for sale. 

If this happens, the transfer of your shares in the business will be considered a transfer of cash for inheritance tax purposes which means that any business relief (BR) will be lost and the value of your shares will become part of your taxable estate. 

It is really important to make sure that your company’s Articles of Association allow you to include a shareholder agreement in the form of a cross option and/or single option agreement and that the shareholders have the power to establish any necessary trusts where applicable.

Funding a share purchase

In most cases the surviving shareholders will not have access to sufficient cash to acquire your shares from your personal representatives. In this case, the co-shareholder policy can pay a lump sum to a beneficiary or beneficiaries to buy the equity (shares) from your personal representatives. 

Setting up the policy 

There are a number of ways to set up the policy. 

  • A life of another policy which gives each owner in the business their own policy. The sum assured is determined by the value of your business partners equity share. This is typically suitable where there are two business partners.
  • Where there are more than two shareholders in a business it is common practice for each shareholder to have their own policy which is written under a business trust. The result is that the death benefit payment is shared among the surviving shareholders equally should one pass away. 
  • Shareholder protection insurance provides a form of succession planning for your business. This type of planning is vital to ensure a successful transition from one director, partner or shareholder to other equity partners within the business should one fall critically ill or pass away unexpectedly. 

How can we help?

We provide bespoke services to each of our clients’ specific requirements and we help business owners of varying sizes across many industries find solutions to help protect their business’ financial future.

For more information get in touch and arrange a free initial consultation with an adviser who can help you find the most suitable policy to meet your specific company's needs. 

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  1. If a double option agreement has included critical illness, the other owners of the business could force you to sell your share. A single option that covers critical illness protects you from this.

Please Note: The FCA does not regulate tax advice