Cross-option agreements for shareholder protection insurance

How shareholder protection and a cross-option agreement work

Shareholder protection is life insurance, sometimes combined with critical illness cover, taken out so that if a shareholder dies the other shareholders have the money to buy their shares. It is usually arranged through a financial adviser. The policy provides the cash, but it gives no one a right to buy or sell the shares. That right comes from a separate legal agreement between the shareholders, usually a cross-option agreement, sometimes called a double option agreement.

Under a cross-option agreement, if a shareholder dies, the surviving shareholders have an option to buy the deceased shareholder's shares, and the deceased shareholder's personal representatives have an option to require the survivors to buy them. Neither side has to do anything unless one of them exercises its option within the time allowed. Once either side does so, the other must complete the sale at the price set by the agreement.

For example, say three people each own a third of a company worth £1.5 million, and each takes out a policy on their own life for £500,000, written in trust for the other two. If one of them dies, the trustees pay £250,000 to each survivor, the survivors exercise their option, and they use the money to buy the shares from the estate at the agreed value. The family receives £500,000 in cash, and the two survivors own the whole company in equal shares.

There are two common ways of holding the policies. In an own-life arrangement, each shareholder takes out a policy on their own life and places it in a business trust for the other shareholders. In a life-of-another arrangement, each shareholder owns a policy on the lives of the others and receives the payout directly. The legal agreement is needed in both cases.

Why the policy needs an agreement

When a shareholder dies, their shares pass to their personal representatives and then to whoever inherits under the will or the intestacy rules. Without an agreement, nothing obliges the family to sell or the survivors to buy. Under the model articles, which apply to many private companies formed since 1 October 2009, the personal representatives cannot vote the shares until they are registered as holders (article 27), and if the family wants to sell to someone outside the business, the directors have a general power to refuse to register the transfer (article 26(5)).

That can leave both sides in a poor position. The family may hold a stake in a private company with no market for the shares, no role in running the business and no control over dividends. The survivors may have to share profits with people who do not work in the business, or with a new owner they did not choose. Meanwhile the insurance has paid out, but nothing requires the people who received the money to use it to buy the shares, or to pay a fair price.

A cross-option agreement links the insurance to the shares. It sets out who can buy, who must sell if asked, how the price is set, how long each side has to act and how the sale is completed, so that the payout funds a prompt sale at a fair price.

Inheritance tax and business relief

Shares in an unlisted trading company can qualify for business relief from inheritance tax. The shares must have been owned for at least two years before the death (Inheritance Tax Act 1984, section 106), and relief is not available if the company's business consists wholly or mainly of dealing in securities, stocks or shares, land or buildings, or making or holding investments (section 105(3)).

The level of relief changed under the Finance Act 2026. For deaths on or after 6 April 2026, 100% relief applies to the first £2.5 million of qualifying business and agricultural property combined, and 50% relief applies to the value above that. Unused allowance of a spouse or civil partner who died first can be transferred, which can take the allowance up to £5 million. Value that is not relieved is charged at the standard inheritance tax rate of 40%, subject to the estate's other allowances.

The wording of the shareholders' agreement matters because of section 113 of the Act. Where a binding contract for the sale of shares has been entered into at the time of the transfer of value, which on death is treated as made immediately before the death (section 4), the shares are not relevant business property and do not qualify for relief. HMRC's Statement of Practice 12/80 says that an agreement under which, on a shareholder's death, the personal representatives are obliged to sell and the survivors are obliged to purchase the shares, known as a buy and sell agreement, is a binding contract for sale, because it requires a sale and purchase and does not merely confer an option to sell or buy. Shares covered by that type of agreement lose business relief entirely.

HMRC's Inheritance Tax Manual (IHTM25292) and its Shares and Assets Valuation Manual (SVM111120) state that an agreement under which the deceased's shares fall into the estate, with an option for the surviving shareholders to buy them, does not constitute a contract for sale and does not prevent business relief. A cross-option agreement is built on options for this reason: immediately before the death nobody is bound to buy or sell, and a contract only comes into existence when an option is exercised afterwards. The Shares and Assets Valuation Manual also says that articles requiring the personal representatives of a deceased shareholder to offer the shares for sale do not disqualify relief, provided nobody is obliged to buy them.

The sale also has capital gains tax and payment consequences. The personal representatives are treated as acquiring the shares at their market value at the date of death (Taxation of Chargeable Gains Act 1992, section 62), so a sale soon afterwards at that value usually produces little or no gain. If inheritance tax on the shares is being paid in yearly instalments, HMRC requires the outstanding tax to be paid in full when the shares are sold.

Fitting the agreement to the articles and shareholder agreement

A cross-option agreement has to work with the company's articles of association and any existing shareholder agreement. Three points need checking.

First, look for any existing provision about shares on death. Some articles and shareholder agreements require a deceased shareholder's shares to be offered to the others at a price set by a formula or valuation. Those provisions can conflict with the cross-option agreement on price, timing or who can buy, and if they bind the estate to sell and the others to buy, HMRC's guidance treats them in the same way as a buy and sell agreement, so relief would be denied. The documents should be aligned, either by amending the other provisions or by stating clearly which one applies on death.

Second, check the restrictions on transfer. If the articles give other shareholders pre-emption rights, or give the directors power to refuse to register a transfer, the shareholders should agree to waive those rights for transfers made under the cross-option agreement, so that a sale cannot be blocked once an option has been exercised.

Third, make sure the agreement covers every shareholder the insurance is meant to protect, and that new shareholders sign up to it when they join. Where shares are held unequally, the agreement should say how the deceased's shares are divided between the survivors, for example in proportion to their existing holdings, so that control does not shift unexpectedly.

Alternatively, the company can buy back a deceased shareholder's shares using a policy it owns. That route must comply with the buyback rules in Part 18 of the Companies Act 2006, including paying for the shares when they are bought, and it can be taxed differently, so your accountant and financial adviser should confirm the structure before the policies are set up.

Setting the price

The agreement must say how the price is worked out when an option is exercised. The main approaches are:

• a fixed price per share, agreed by the shareholders and updated at regular intervals, which is simple but leaves one side at a disadvantage if it has not been updated;
• a formula based on the company's accounts, such as a multiple of profits or net assets, which updates automatically but can produce odd results after an unusual year;
• a valuation as at the date of death by an independent accountant acting as an expert, which reflects the actual value but takes time and adds cost.

The clause should also say whether the shares are valued as a proportion of the whole company or discounted because a smaller holding does not carry control. The difference between the two can be large in pounds, so the agreement should state the basis.

The price and the insurance will rarely match exactly. If the value of the shares is higher than the payout, the agreement should say how the balance is paid, for example in instalments over an agreed period with interest and security for the estate. If the payout is higher than the value, the agreement and the trust should make clear who keeps the surplus. Review the sums insured whenever the value of the company changes significantly, because cover can fall short as the business grows.

The agreement should also set a timetable: how long after the death the survivors have to exercise their option, how long the personal representatives have after that, and how soon completion must follow. Personal representatives normally need a grant of probate or letters of administration to show the company they are entitled to the shares, so the time limits should allow for obtaining one. The buyers pay stamp duty of 0.5% on the price where it is over £1,000, within 30 days of the stock transfer form being signed and dated.

Putting the policies in trust

Own-life policies are normally written into a business trust, with the other shareholders as beneficiaries. The trust means the payout goes to the people who need it to buy the shares, without forming part of the deceased shareholder's estate. The trust form is often supplied by the insurer through the adviser, but the solicitor drafting the cross-option agreement should check that the two documents match: that the right people are beneficiaries, that a shareholder who leaves the company can be removed and a new one added, and that the trustees can act promptly after a death.

HMRC's Inheritance Tax Manual (IHTM44115) describes policies taken out solely to fund the purchase of a business owner's share by the others as prudent business planning, and accepts that an arrangement on commercial terms involves no gift for inheritance tax. The trust is still a settlement for inheritance tax purposes, and if the policyholder keeps a benefit, such as being able to cash in the policy on leaving the business, the annual income tax charge on pre-owned assets can apply, although HMRC says ordinary term assurance on someone in normal health is likely to have too little value for a charge to arise.

A trust holding life policies that pay out only on death, terminal or critical illness, or disablement is excluded from registration on HMRC's Trust Registration Service while the insured person is alive. After a death, the exclusion continues for two years while the trustees hold the payout, and if the money has not been distributed by then the trust must be registered (TRSM23030).

Decide who pays the premiums. Where each shareholder pays for their own policy, the cost reflects each person's age, health and the size of their stake, and the shareholders can agree balancing payments if they want to share the cost equally. If the company pays the premiums, the tax treatment is different, and your accountant should confirm it before the policies start.

What happens without an agreement, or with the wrong one

For example, say two shareholders each own half of a company and each has a policy written in trust for the other, but there is no cross-option agreement. If one of them dies, the survivor receives the insurance payout, and the deceased shareholder's family inherits the shares. The family has no right to make the survivor buy them, and the survivor has no right to buy. The survivor may offer a low price or nothing at all, leaving the family holding half of a company they cannot sell, with no salary from it and no control over dividends.

The opposite problem arises where shareholders have a buy and sell agreement that obliges both sides to complete a sale on death. The sale goes ahead, but because a binding contract for sale existed at the time of death, business relief is not available on the shares under section 113, and the estate may face inheritance tax on their full value, subject to its other allowances. If your agreement says the survivors must buy and the estate must sell, have it reviewed and, where appropriate, replaced with an option agreement.

Partnerships and LLPs face the same issues. HMRC's manual also accepts that a partnership agreement under which a deceased partner's interest passes to the surviving partners, who are required to pay the personal representatives a set price, is not a contract for sale. Our guide to partnership agreements explains how those clauses fit into the wider agreement.

Setting up an agreement and keeping it current

The financial adviser recommends the type and amount of cover, arranges the policies and provides the trust forms. The accountant advises on the valuation method and the tax treatment of premiums. The solicitor drafts the cross-option agreement, checks it against the articles, any shareholder agreement and the trust, and makes sure the shareholders' wills are consistent with it. Signing the agreement when the policies start avoids a period in which the insurance is in place but the right to buy is not.

To prepare the agreement, we need the company's articles and any shareholder agreement, the register of members, the policy schedules and trust deeds, recent accounts, and the shareholders' preferences on how the price should be set. We agree the scope and cost in writing before we start, and we can work directly with your financial adviser and accountant.

Review the agreement and the cover together whenever a shareholder joins or leaves, shareholdings change, the value of the company moves significantly, a shareholder's health or family circumstances change, or the policies are replaced. Some agreements also include options on critical illness, allowing a shareholder diagnosed with a specified illness to require the others to buy their shares during their lifetime, funded by critical illness cover. A sale during a shareholder's lifetime is taxed differently from a sale after death, so that part of the agreement needs separate tax advice.

Frequently asked questions

What is a cross-option agreement?

A cross-option agreement is a contract between shareholders that applies if one of them dies. The surviving shareholders get an option to buy the deceased's shares, and the deceased's personal representatives get an option to require the survivors to buy them, at a price set by the agreement. The purchase is normally funded by shareholder protection insurance written in trust. Because neither side is bound to buy or sell at the time of death, the agreement is designed not to prevent the shares qualifying for inheritance tax business relief.

Why not use a buy and sell agreement instead?

Because HMRC treats a buy and sell agreement, which obliges the estate to sell and the survivors to buy on death, as a binding contract for sale under section 113 of the Inheritance Tax Act 1984. HMRC's Statement of Practice 12/80 says business relief is then not due on the shares, so the estate could pay inheritance tax on their value. An agreement based on options produces the same practical result, a sale funded by the insurance, and HMRC's manuals say an option for the survivors to buy does not prevent relief.

Does a cross-option agreement cover critical illness?

It can, if the shareholders have critical illness cover and the agreement includes options that apply during a shareholder's lifetime. One approach lets a shareholder diagnosed with a specified illness require the others to buy their shares using the critical illness payout. A lifetime sale is subject to capital gains tax rather than the inheritance tax rules that apply on death, so the price, the definition of the illness and the tax position all need to be settled when the agreement is drafted.

Who should own the shareholder protection policy?

There are two common approaches. Each shareholder can take out a policy on their own life and place it in a business trust for the other shareholders, or each shareholder can own policies on the lives of the others. Own-life policies in trust can suit companies with several shareholders, because the trust can be updated when people join or leave. Your financial adviser will recommend the structure, and the cross-option agreement and the trust should be drafted to match it.

What happens if the insurance payout is less than the value of the shares?

Once an option is exercised, the survivors still have to pay the full price set by the agreement, so the agreement should say how any shortfall is paid. One approach is payment of the balance in instalments over an agreed period, with interest and security for the estate. To avoid a shortfall, review the sums insured whenever the company's value changes significantly, and check the valuation clause and the level of cover together at each review.

Do we still need a cross-option agreement if our articles have pre-emption rights?

In most cases, yes. Pre-emption rights usually require shares to be offered to the other shareholders before they can be sold to an outsider, but they do not normally oblige anyone to buy the shares or require the estate to sell. That leaves the family and the survivors without a guaranteed route to a sale. HMRC guidance says articles requiring shares to be offered do not affect business relief if no one is obliged to buy, so the articles and a cross-option agreement can work together once they are aligned.

What happens to the agreement when a shareholder leaves the company?

The agreement should end for that shareholder when they stop holding shares, and the policies and trust need to be updated. A departing shareholder's own-life policy may be removed from the business trust or kept for personal use, depending on the trust terms, and the remaining shareholders may need new cover. A new shareholder should sign up to the agreement and take out matching cover. Review the valuation clause and sums insured at the same time, because the balance of shareholdings will have changed.

Sources & further reading

• GOV.UK — HMRC Statement of Practice 12 (1980): business property relief and buy and sell agreements
• GOV.UK — HMRC Inheritance Tax Manual IHTM25292: contracts for sale, shareholdings and partnership interests
• GOV.UK — HMRC Shares and Assets Valuation Manual SVM111120: property subject to a contract for sale
• GOV.UK — Business Relief for Inheritance Tax: what qualifies
• legislation.gov.uk — Inheritance Tax Act 1984, section 113
• GOV.UK — HMRC Inheritance Tax Manual IHTM44115: business trusts and partnership policies
• GOV.UK — HMRC Trust Registration Service Manual TRSM23030: insurance policies
• GOV.UK — Pay your Inheritance Tax bill: yearly instalments

This article is general information, not legal advice. The law changes and depends on your circumstances — always take advice on your specific situation before acting. Last reviewed 17 September 2026. Buzz Solicitors is a trading name of AD Solicitors Limited, a recognised body regulated by the SRA (no. 8011228).