In the dynamic flow of running a business, planning for succession often takes a back seat for owners and directors. However, preparing for unforeseen illness or death is vital to avoid potentially destructive consequences to your family, fellow shareholders, and the business itself. It's something every shareholder should plan for now to ensure a secure future.
If you don’t have the right plans in place, you could one day find yourself working with your co-shareholder’s family. They'll have to navigate important decisions with you, possibly with limited knowledge of the business. This can lead to tensions and misalignment of interests. If the new shareholders don't fully understand their responsibilities or fail to actively engage with the business, decision-making may come to a halt.
This isn't just an uncomfortable personal situation; it could harm the well-being of the business and your own prosperity.
Ponder on your family's financial future in a world without you and consider where your share of the business should fit in. Would they want to step into your shoes or would they rather receive the equity you have strived to build in cash?
Leaving your family and fellow shareholders financially and legally entangled if the cash cannot be raised quickly can be avoided.
Thoughtful planning now can protect your family and fellow shareholders, as well as the integrity of the business you've worked hard to build.
We help business owners craft a crisis succession plan, ensuring they can navigate through these situations and access financial liquidity precisely when it's needed. Our approach is built upon a consultative and professional ethos, centred around your unique business an personal needs. We aim to deliver expert impartial advice backed by years of experience.
The passing of a shareholder can trigger a cascade of complex matters. In the absence of specific provisions in a shareholders’ agreement and your articles of association, the transfer of shares follows the deceased’s will or, in the absence of a will, the intestacy rules.
Mitigating these issues involves a thorough review of your articles of association and shareholders’ agreements. Shareholders typically leave their shares to their own family, so it's crucial that wills are up to date to prevent minimise additional disruption due to intestacy. If a spouse or civil partner inherits your shares, it's usually an exempt transfer for inheritance tax purposes. If a discretionary trust or another individual inherits your shares, it's generally a non-exempt transfer. Shares held in private companies can benefit from 100% business property relief for inheritance tax if the shareholding and transfer on death meet qualifying conditions..
Enter the concept of cross-option agreements. These involve shareholders granting each other options that come into effect upon a fellow shareholder’s demise. The agreement allows surviving shareholders to buy the deceased's shares at market value, and personal representatives are given the option to sell the shares to surviving shareholders. A properly drafted agreement will ensure a smooth transfer and ensure the transfer qualifies for business property relief and free from inheritance tax.
There are two common types of option agreements. These agreements give at least one party the option, but crucially not the right, to pursue a transfer of shares.
Creates an option for surviving shareholders to purchase a deceased shareholder’s shares before they can be transferred or sold to a third party. The agreement must be carefully worded care to avoid an obligation. Getting this wrong will result in losing business property relief.
Essentially, a single option agreement serves as a financial safety net for shareholders facing health-related challenges.
The agreement creates an option for a shareholder who has suffered a serious illness to sell shares to fellow shareholders or to directors.
This arrangement creates flexibility during a challenging health situation, enabling the shareholder to address any financial needs and focus on the path to health and wellbeing without being tied to the business.
Ensuring the arrangements are backed by appropriate life insurance is absolutely crucial. It secures the lump sum cash payment that will be needed if the agreement is ever activated, facilitating quick settlement during difficult times and minimising business disruption.
Three young entrepreneurs building their consultancy business together; Mr Brown, Mrs Rose and Miss Green. They respectively own 50%, 30% and 20% of the business. If either of them were to fall seriously ill or die unexpectedly, the business would suffer a significant financial impact. Aside from the direct effect of losing a key person, the surviving shareholders would face the added pressure of having to raise capital to buy our their departed colleague.
The shareholders drew up an agreement with a double option, which stated that if a shareholder had to leave the business due to death or serious illness, the remaining shareholders would have the right to buy their share. To make sure they would always have the money readily available to do so, they each took out an insurance policy. It only cost a total of £33.19 per month for all three shareholders to have life insurance, but they chose to add critical illness cover for an extra £213.09 a month. They could either pay the cost as a business expense (saving Corporation tax but incurring a small Benefit in Kind tax charge) or pay it themselves. They took out a 10-year insurance term with fixed monthly payments and the option to top-up cover if the business grew in value. When the 10 years is up, they are guaranteed the option to renew no matter what their health situation. This now keeps protection in place for as long as they need it, while we informally review the value of the business each year to ensure the insurance remains adequate.
Premiums are based each shareholder being a non-smoker and accepted at standard rates during February 2024.
Mr. Brown sleeps well at night knowing that the cash value of his share in the business will be secure for his family in case of his passing or serious illness. Moreover, he takes comfort in his ability to guide the business through the loss of a fellow shareholder if the tables were turned.
Active Business Protection Limited is an appointed representative of Active Mortgage Services Limited,
which is authorised and regulated by the Financial Conduct Authority.
Registered office 3 Highcliffe View, Westgate, Guisborough. TS14 6AY
Registered in England with company number 14535477
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