Cross Option Agreements

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If you or a business partner dies their share will pass to their spouse or beneficiaries through their Will. This is now deemed to be part of their estate.

Whilst this share is held, and the business continues trading then the assets could be exempt from Inheritance Tax if they qualify for Business Property Relief (BPR).

Once the Cross Option Agreement has been executed and then BPR is no longer available on the proceeds i.e. from any life assurance payouts. The spouse’s assets are assessable for Inheritance Tax (IHT) and have now increased by the funds received from the life assurance policy, risking 40% of the proceeds to IHT.

Depending on the size of the business this could be a significant loss. These assets are also now at risk from attack from any future remarriage claims, creditors or bankruptcy and Long-Term Care costs.

“Whilst Cross Option Agreements ensure that the surviving business partner(s) has the right to buy out the deceased’s share of the business and the family to sell, the taxation consequences on both sides will be exacerbated.”

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FAQs – Cross Option Agreements

What exactly is a Cross Option Agreement?
Sometimes referred to as ‘Put and Call’ agreements, a ‘call option’ allows the holder the right to buy shares and a ’put option’ allows the holder the right to sell shares.
How would a Cross Option Agreement help in the eventuality of the death of a business partner/director?
This would ensure that the surviving business partner/s has the right to buy out the deceased’s share of the business. The proceeds of any life assurance policy could be paid to the surviving spouse or beneficiaries, in exchange for their inherited share of the business. Equally, the surviving spouse or beneficiaries would be able to exercise their right to sell this share of the business to the remaining business partner/s in exchange for either the market value or an agreed amount covered by a life assurance policy.
What are the consequences of a standard Cross Option Agreement to the surviving business partner?

With a standard Cross Option Agreement, the surviving partner now owns 100% of the company. This is fine whilst the business is still trading and Business Property Relief (BPR) is still applicable. However, when they want to sell, BPR will be lost and the value of the survivor’s estate for Inheritance Tax has increased and subject to other 3rd party attacks.

What would happen when the surviving spouse decides to sell their share of the business?

Now their personal estate will be increased to include the proceeds from the sale. This leaves the spouse wide open to attack from Inheritance tax, creditors/bankruptcy, remarriage and subsequent divorce settlements and long-term care costs.

“I had consulted extensively with a number of solicitors and accountants in relation to Estate & Inheritance Tax Planning, none of whom were able to provide satisfactory answers. However, we have found in Michael Doctors and his team of qualified experts, a knowledge, experience & service of the highest calibre. We will not hesitate to recommend them.”

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