Calculate shareholder protection insurance requirements for UK businesses. Ensure business continuity and fair value buyout on death or critical illness.
Shareholder protection insurance ensures that if a business owner or shareholder dies or suffers a critical illness, the remaining shareholders can buy out the deceased or ill shareholder's stake at fair market value. Without it, a deceased shareholder's family may inherit shares and become unwanted co-owners, or the business may be forced into a disruptive sale.
Each shareholder takes out a life and/or critical illness policy on their own life (or each other's life) in trust for the other shareholders. A cross-option agreement (or double option agreement) is set up so that on death, the surviving shareholders have the option to buy the shares, and the deceased's estate has the option to sell. This ensures both parties have the right but not the obligation.
You need cover equal to the current market value of your shareholding. This value should be reviewed annually or whenever the business valuation changes significantly. Use an agreed formula in the shareholders' agreement (e.g., EBITDA multiple or net asset value) so there is no dispute about the buyout price.
When set up on an 'own life in trust' basis, the policy proceeds are paid directly to the trust for the surviving shareholders, outside the deceased's estate. This means no inheritance tax on the policy proceeds. The proceeds are typically used to purchase the shares, which may have CGT implications for the estate.
A cross-option agreement (also called a double option agreement) is a legal document alongside the shareholder protection policy. It gives surviving shareholders the option to buy the deceased's shares (a 'call option') and gives the deceased's estate the option to sell the shares (a 'put option'). Both options are exercisable within a fixed period after death, ensuring the shares change hands at an agreed price.