Business Cross Option Agreements

Perhaps You Have Made Some Provision For This Eventuality

You may feel that you have prepared for the worst and taken out sufficient life cover to protect all parties’ shares of the business. You may even have had the presence of mind to set up a Company Will and a Cross Option Agreement.

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 the 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.

But What About The Impact A Standard Cross Option Agreement Has On Someone's Estate?

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 has been effected then BPR is no longer available on the proceeds ie from any life assurance. The spouse's assets assessable for Inheritance Tax (IHT) 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.

What About The Consequences A Standard Cross Option Agreement Has For 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 whilst BPR is still applicable.

However, what would happen when they decide to sell 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, divorce settlements and long Term care costs.