Shareholder Protection
Maintain control and stability in periods of uncertainty
The sudden loss of a shareholder can have a wide-reaching business impact. We make sure you’re prepared to steady the ship.
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Prepare for the unexpected
Shareholder Protection safeguards your business from the instability caused by the loss of a shareholder due to illness or death. It's an essential strategy to maintain continuity and ensure that your business can smoothly navigate the disruption without financial strain.
Keep your business under your control
In the worst case, an absent shareholder could mean you lose control of your business or are forced to sell it. Shareholder Protection ensures your business doesn’t need to use its reserves to buy crucial shares and keeps control with the current owners. It also simplifies the share transfer process, minimising disruption and providing clear, agreed-upon financial outcomes for a deceased shareholder's family. With flexible terms, it accommodates unique situations like critical illnesses, adapting to your specific needs.
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The secrets to securing your business
Shareholder Protection is essential but not always simple. Access the insight you need to make the right policy choices by downloading our detailed guide.
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FAQs
How is shareholder protection structured?
There are three main ways to set up shareholder protection:
- Own life plans under business trusts – Each shareholder takes out a policy on their own life, written in trust for the benefit of other shareholders.
- Life of another plans – Each shareholder owns policies on the lives of other shareholders.
- Company-owned plans – The company takes out policies on shareholders to fund the buyback of shares.
Speak to your Broadbench financial adviser to determine the best option for your business.
What is a cross-option agreement?
Also known as a double-option agreement, this gives surviving shareholders the option to buy shares from the deceased shareholder’s personal representatives.
- If either party wishes to exercise their option, the other must comply.
- The option can only be exercised after death, within a specific timeframe.
Does a cross-option agreement affect IHT business property relief?
No. If a shareholder passes away while owning shares in an unquoted trading company, 100% Business Property Relief (BPR) may apply for inheritance tax (IHT) purposes, as long as the shares were held for at least two years.
Even if the estate receives cash for shares under a cross-option agreement, BPR is preserved because:
- The option is only exercisable after death.
- There is no binding contract to sell at the time of death.
What happens if shareholders enter into a buy/sell agreement?
A buy/sell agreement would deny Business Property Relief.
- Shareholders agree that, upon the death of one, the remaining shareholders must buy their shares, and the estate must sell.
- Life insurance is taken out to fund the purchase.
Since this creates a binding contract at the time of death, HMRC treats the shares as already converted into cash, making them fully subject to IHT.
How does critical illness affect shareholder protection?
A critically ill shareholder may be unable to contribute to the business and may want to exit. Their co-shareholders will need funds to buy their shares.
- If a business trust is used, a policy with critical illness cover can be written under the trust.
- Instead of a cross-option agreement, a single-option agreement is recommended. This ensures that a critically ill shareholder is not forced to sell against their wishes.
A forced sale could trigger capital gains tax (CGT) and future IHT liabilities, as the shareholder would receive cash instead of retaining shares that may qualify for IHT Business Property Relief.
What happens if the single option is not exercised?
If a shareholder receives a critical illness payout but chooses not to sell their shares, we recommend keeping the proceeds within the trust until the succession issue is resolved.
Although the funds might be available, they were intended for share buyout purposes. Distributing them to the critically ill shareholder could lead to tax complications.
Are there disadvantages to leaving proceeds in trust?
Yes, there is a potential Pre-Owned Asset Tax (POAT) charge.
POAT is an income tax charge applied when someone benefits from an asset they previously owned. While Business Trusts used for shareholder protection fall under POAT, in most cases, the annual benefit remains below the £5,000 tax-free limit.
- The charge is 2% of the open market value of the life plan (subject to official rate changes).
- While the insured person is healthy, the market value is low, meaning no charge applies.
- If they become critically ill and the funds remain in trust, the value increases, potentially triggering POAT.
To avoid this, the settlor (original policyholder) can be removed as a beneficiary of the trust. However, this may have IHT implications, which should be reviewed with a Broadbench adviser.