Shareholder and Partnership Protection Insurance
When looking at corporate life assurance and shareholder protection, the starting point should be the articles of association.
Automatic Accrual Arrangement
With automatic accrual shareholder arrangement:
- it is essential that life cover is kept up to date.
- the directors look after their family by taking out a life assurance policy on their own lives under trust for the benefits of their dependents.
- interest in the business passes to the surviving partner automatically, with no payment being made.
- it is normally only used for partnerships, where the main asset of the business is goodwill
- each partner takes out a life policy on their own life, held in trust for their dependents as compensation for the fact that they will not receive anything from the business.
Buy and Sell agreements
The features of Buy and Sell agreements are:
- Surviving parties must purchase and inheritor must sell
- Binding contract
- Not eligible for business property relief for IHT
Double Option (Cross Option) agreements
The cross option agreement is generally preferred to a Buy and Sell agreement for IHT reasons. The features of double Option (Cross Option) agreements are:
- Not a binding contract.
- Surviving parties have the option to purchase.
- If one side exercises the option, then the other side must comply.
- IHT Business property relief may be claimed.
- Option is exercised or not within a relatively short time period, eg six months from death.
Single Option Agreements
A forced sale due to ill health could result in Capital Gains Tax liability for the ill director and exchanging an IHT-free asset (in the form of unlisted shares) for cash which would be subject to IHT.
A single option is designed for critical illness because:
- it allows the ill partner/shareholder to force a sale to the other parties.
- a double option (on death) means the partner/shareholder has to sell.
- the remaining partners/shareholders cannot force a sale of the ill party’s share because they might get better and return to the business.
Business Property Relief (BPR) provides relief from Inheritance Tax (IHT) on the transfer of relevant business assets at a rate of 50% or 100%. The relevant property must be held for at least two years in order to qualify for relief.