Cross-Option Agreements and Shareholder Protection Insurance Explained

When a business partner or co-director dies, the company faces one of its most disruptive possible events. Without planning, the deceased's shares pass to their estate and, from there, potentially to a spouse, children, or other beneficiaries who have no business relationship with the surviving shareholders and may have no interest in the company. The surviving directors may find themselves working alongside unknown or unwilling co-owners. The business may be paralysed while the estate is administered.

Shareholder protection insurance, properly structured alongside a cross-option agreement, solves this problem. It provides the funds to purchase the deceased's shares and creates a legal framework that ensures the purchase actually happens smoothly. This guide explains how the structure works and why the legal agreement — not just the insurance — is critical.

The Core Problem

Consider a straightforward scenario: two equal shareholders in a trading limited company, each owning 50%. One director dies. Their 50% shareholding passes to their estate. The estate's executors and, ultimately, the beneficiaries (perhaps a spouse with no business involvement, or children still at school) become 50% shareholders.

The surviving director now shares ownership with someone who:

• May not understand the business
• May want to sell the shares to anyone willing to buy
• May demand dividends at a time when the business needs to retain cash
• May be in dispute with the deceased's estate over other matters, which spills into the business

Simultaneously, the estate may be trying to sell the shares but finding no obvious buyer — the surviving director cannot force a purchase, and the executors cannot force a sale. Both parties may be frozen.

The solution is an agreement entered into by all shareholders before death, committing the parties to a defined purchase mechanism. The insurance provides the money; the agreement provides the legal obligation to use it.

What Is a Cross-Option Agreement?

A cross-option agreement (sometimes called a double option agreement) is a legal contract between shareholders that gives each party an option in the event of a co-shareholder's death:

• The surviving shareholders have a call option — the right (but not the obligation) to purchase the deceased shareholder's shares at a price determined by the agreement.
• The deceased's estate has a put option — the right (but not the obligation) to sell the deceased shareholder's shares to the surviving shareholders.

Crucially, these are options, not obligations. Neither party is automatically required to buy or sell. But if either party exercises their option, the other must comply. In practice, where both insurance proceeds and a willing buyer and seller exist, both options are typically exercised simultaneously — the estate exercises its put, the survivors exercise their call, and the transaction completes cleanly.

Why Options Rather Than Automatic Buy-Sell?

An automatic buy-sell agreement — where death automatically triggers an obligation on both parties to buy and sell — has an important tax disadvantage. HMRC treats an automatic buy-sell arrangement as a binding contract for sale, which means it may prevent the shares from qualifying for business property relief (BPR) for inheritance tax purposes.

Business property relief is extremely valuable, though it is no longer unlimited. From 6 April 2026, 100% BPR (combined with any agricultural property relief) applies only to the first £2.5 million of qualifying assets per individual; value above that allowance attracts relief at 50%, giving an effective IHT rate of 20% on the excess. The allowance is transferable between spouses on death, so a couple can potentially shelter up to £5 million at 100%. Shares in a qualifying unquoted trading company therefore still pass largely or wholly free of inheritance tax where their value falls within the available allowance. For a 50% stake in a company worth £2,000,000 — a £1,000,000 holding that sits within the £2.5 million allowance — BPR can shelter the full value, saving up to £400,000 in IHT (the 40% charge that would otherwise apply to the £1,000,000 above the nil-rate band).

Where there is a binding obligation to sell, HMRC may argue that the shares are not genuinely being transferred under BPR — there is a pre-existing obligation that overrides the estate's normal inheritance of the asset. The BPR exemption can potentially be lost.

A cross-option agreement, by contrast, is structured as two independent options. There is no automatic obligation to buy or sell. BPR applies to the shares on death because there is no binding contract at the moment of death. The options are then exercised independently, and the purchase proceeds from this voluntary transaction — funded by the insurance policy — go to the estate.

The estate may then use those proceeds to meet IHT liabilities on other assets. The BPR protects the value of the shares themselves from IHT; the insurance proceeds fund the purchase without creating an IHT problem.

Own-Life Policies Held in Trust

The insurance structure that accompanies a cross-option agreement uses own-life policies held in trust for each shareholder. This means:

• Director A takes out life assurance on their own life, with the policy held in a discretionary trust for the benefit of the surviving business partners (or more broadly, for the purposes of the agreement)
• Director B does the same
• On Director A's death, the trust pays the sum assured to the trustees. The surviving Director B (and/or trust beneficiaries) uses these funds to purchase the shares from Director A's estate.

Each director holds their own policy — there is no joint policy. This is important because joint policies create complications: a joint life first-death policy pays on the first death but provides nothing on the second death, leaving the surviving business without cover for the remaining shareholder's risk.

The trust structure ensures the insurance proceeds are not taxable to the surviving director as personal income and do not form part of their estate. The proceeds pass directly to be used for the share purchase.

Valuation: How Is the Share Price Set?

The cross-option agreement must specify how the shares will be valued for the purposes of the purchase. Options include:

Fixed sum — The simplest approach, but risks quickly becoming out of date as the business grows. Not recommended for actively growing businesses.

Formula-based valuation — The agreement specifies a formula (e.g. three times net profit, or EBITDA multiple). Applied to the most recent accounts at the date of death, this provides an objective valuation. Requires that the formula remains commercially relevant as the business evolves.

Accountant-determined value — The agreement specifies that an independent accountant (often the company's auditor or a jointly appointed valuer) determines the value at the time of death. More flexible, but introduces delay and potential dispute.

Most recent formal valuation — Where the shareholders commission regular formal valuations (e.g. every three years), the most recent valuation applies. Practical for established businesses that already undergo regular valuations for other purposes (HMRC share scheme valuations, pension fund purposes, etc.).

Whichever method is chosen, the shareholder protection insurance sum assured must track the agreed valuation. If the business grows significantly and the valuation increases, the insurance must be increased to match — otherwise the surviving shareholders cannot fund the full purchase and the agreement becomes difficult to implement.

What Happens in Practice: Step-by-Step

When a shareholder dies:

1. The life insurance policy on the deceased's life pays out to the policy trust.
2. The surviving shareholders are notified and invoke the cross-option agreement.
3. Typically, both options are exercised simultaneously — the estate's put option and the survivor's call option. (In practice, both parties' solicitors agree to simultaneous exercise.)
4. The agreed valuation is applied (using whatever method the agreement specifies).
5. The trust funds are used to purchase the shares from the estate at the agreed valuation.
6. The shares are transferred to the surviving shareholders (or the company, if a company purchase structure is used).
7. The estate receives the purchase price — cash that can be distributed to beneficiaries or used to meet the estate's liabilities.
8. The surviving shareholders own 100% of the company and can continue trading without interruption.

The total elapsed time from death to completed share transfer, where everything is well-organised, can be as short as two to three months. Without a cross-option agreement and insurance, the same process might take years of negotiation, legal proceedings, and potential court applications.

Company-Owned Versus Own-Life Structures

An alternative to the own-life trust structure is a company purchase arrangement, where the company itself buys back the deceased's shares. In this structure:

• The company holds life insurance on each shareholder
• On death, the company uses the insurance proceeds to buy back the shares
• The shares are cancelled or held in treasury
• The surviving shareholders' percentage stakes increase proportionally

The company purchase approach is simpler administratively — the company holds all policies and there is no need for individual trusts. However, it has some disadvantages:

• Insurance premiums paid by the company may be treated as a benefit in kind for the insured director, potentially creating a tax liability
• Company-owned insurance proceeds are a corporate asset and potentially accessible to company creditors
• Capital gains tax position on the shares held by the estate may be less straightforward

The own-life in trust structure is generally preferred by most advisers for its tax efficiency and clean separation of insurance assets from company assets.

Taxation of the Insurance Proceeds and Share Purchase

Where own-life policies are correctly held in discretionary trusts:

• Insurance proceeds paid to the trust are not subject to income tax or capital gains tax
• The deceased's shares qualify for BPR (assuming the company is a qualifying unquoted trading company) — at 100% on value within the £2.5 million allowance and 50% on any excess from 6 April 2026, so little or no IHT on the shares themselves where they fall within the allowance
• The purchase proceeds received by the estate are cash — taxable as part of the estate, but most executors use these funds to meet other estate expenses or distribute to beneficiaries
• Capital gains tax on the disposal of shares: the estate acquires the shares at their market value at the date of death (probate value). If the shares are sold at exactly this value (as in a cross-option exercise), no CGT arises

This combination of tax reliefs — BPR on the shares, clean insurance payment to the trust, no CGT on disposal at probate value — makes the cross-option and own-life trust structure one of the most tax-efficient business protection arrangements available.

Keeping the Agreement and Insurance in Sync

The cross-option agreement and the insurance policies must be kept aligned. Common sources of misalignment:

• Business grows but insurance is not reviewed. The agreement calls for shares to be purchased at a valuation significantly higher than the insurance sum assured. The survivors cannot complete the purchase.
• Shareholder proportions change. A new shareholder joins, or an existing shareholder sells a portion of their stake. The agreement must be updated to reflect the new ownership structure.
• Director leaves the company. A director who sells their shares and leaves the business should be removed from the cross-option agreement, and the remaining shareholders' policies reviewed.
• Company no longer qualifies for BPR. If the company moves into investment or property activities, it may lose BPR status, changing the tax analysis materially.

An annual review of both the agreement and the insurance ensures the structure remains fit for purpose.

International Shareholders

Where shareholders are not UK-resident, the cross-option agreement and BPR analysis become more complex. BPR applies to UK unquoted trading company shares regardless of the shareholder's residence, but the interaction with foreign succession laws may affect how the estate handles the shares.

Civil law jurisdictions (France, Germany, Spain, much of continental Europe) apply forced heirship rules that may make it difficult for the estate to sell shares under a cross-option arrangement without the agreement of forced heirs. International shareholders should take legal advice in their country of domicile on the interaction between the cross-option agreement and local succession laws.

How Global Investments Can Help

Global Investments advises business owners on the design and implementation of shareholder protection insurance and cross-option agreements. We work alongside the business's solicitors to ensure the legal and insurance elements are properly aligned, and we review the structure regularly to maintain the valuation match as the business grows.

For businesses with internationally resident shareholders or complex ownership structures, we provide integrated advice covering UK and offshore elements. Contact us to review your current shareholder protection arrangements or to put a structure in place for the first time.

This guide is for information only and does not constitute regulated financial or legal advice. Tax treatment depends on individual circumstances and BPR qualification depends on specific company activities. Seek independent professional advice before establishing any shareholder protection arrangement.