Cross option agreements, and the cover that funds them
The document decides who buys the shares. The insurance decides whether they can afford to. We sort the second part, and work with your solicitor on the first.
Book a 30-min business protection callA cross option agreement is the document that decides what happens to a shareholding when a business owner dies. Get it right and the surviving shareholders keep control of the business. Get it wrong, or skip it, and the shares in the company can end up with people who never wanted to be involved in the business at all.
We are protection specialists, not solicitors. A solicitor drafts the agreement. We arrange the shareholder protection insurance that puts the money on the table when the agreement is triggered, which is the part most businesses forget.
What is a cross option agreement and how does it work?
A cross option agreement is a short legal contract signed by the shareholders of a private limited company. It gives the surviving shareholders the option to buy a deceased owner's shareholding, and it gives the deceased's family the option to sell the shares to those same shareholders. Neither side is forced to act. Either side can start the process, and once one side exercises, the other is obliged to complete.
It is often called a double option agreement, because there are two options running in parallel: a call option held by the surviving business owners, and a put option held by the personal representatives of the estate. That two-way structure is deliberate, and it is what keeps the arrangement from being treated as a binding contract for sale from day one. In practice the agreement sits alongside the shareholder agreement and the company's articles of association, and it is funded by an insurance policy so the funds to buy the shares actually exist on the date of death.
Option agreements of this kind are used by private limited companies, partnerships and LLPs. The mechanics are the same: an option to buy on one side, an option to sell on the other, and life cover behind both.
What happens if there is no cross option agreement in place?
Without an agreement in place, the shares pass under the shareholder's will, or under intestacy if there is no will. The shareholder's family inherit the shareholding, and with it a voice in the running of the business. The remaining shareholder or shareholders may have no right to buy the shares at all, and no funds to buy them even if the family agreed to sell.
That leaves both sides stuck. The deceased's family hold an asset they cannot easily turn into cash and may not want, while the fellow shareholders lose control of the business they built. We have seen a spouse with no interest in the business end up on the share register opposite two working directors, with nobody able to agree a price for the shares. A cross option agreement and a matching protection arrangement would have settled it inside three months.
Is a cross option agreement legally binding?
Yes. It is a binding legal contract, drafted by a solicitor and signed by every shareholder who is party to it. What it is deliberately not is a binding contract for sale, and that distinction carries real weight when it comes to tax.
Each option is exercisable only within a defined option period, usually somewhere between three and twelve months from the date of death, or from the diagnosis where a shareholder becomes critically ill. Until one side exercises, no sale of the shares has been agreed and no obligation to buy the shares exists. Drafting is a job for a corporate solicitor, not for us. We work alongside yours so the wording and the cover match.
How is a cross option agreement funded through insurance?
Through shareholder protection insurance. Each shareholder takes out life cover, usually with critical illness cover added, for the value of their shares. The policies are normally written into a business trust so the proceeds to buy the shares reach the surviving shareholders directly rather than sitting inside an estate.
When a shareholder dies or becomes critically ill or dies during the term, the policy pays a lump sum to the other owners. They use the money to buy the shares at the price for the shares set by the valuation method in the agreement. The family sell the shares and receive cash; the business carries on. Sizing is simple arithmetic: the value of the business multiplied by each shareholding, reviewed whenever the company's value moves. An out-of-date sum assured is the most common reason these arrangements fall short.
Relevant life insurance and key person insurance are different products solving different problems, and they often sit alongside shareholder protection rather than replacing it.
Does a cross option agreement affect inheritance tax and business property relief?
This is exactly why the double option structure exists. Where owners enter into an agreement that obliges the estate to sell and the survivors to buy, HMRC can treat it as a binding contract for sale. That can stop the shareholding qualifying for business property relief, which in turn changes the inheritance tax position for the family.
Because a cross option agreement gives each side only an option to purchase or an option to require a sale, and neither party is committed until an option is exercised, it is generally accepted as preserving business relief. The tax implications depend on your company structure and should be confirmed with your accountant and solicitor.
Not sure whether your existing agreement still qualifies for business property relief?
Get it reviewedHow much does a cross option agreement cost?
There are two costs and they are easy to confuse. The first is legal: a solicitor drafting the agreement for a small private limited company will normally quote a fixed fee, and it is a one-off. The second is the insurance premium, which is the ongoing cost and by far the larger number over time.
Premiums depend on the age and health of each business owner, the sum assured, the term, and whether critical illness cover is included. Two owners of the same age can be quoted very different prices. Any figures we give you are illustrative only until an insurer has underwritten the application. What we can say is that leaving the agreement unfunded costs nothing today and everything later.
Cross option agreement or buy and sell agreement?
Both get the shares into the right hands. Only one of them protects the family's tax position while doing it.
Buy and sell agreement
- The estate must sell and the survivors must buy
- Simple to explain, mandatory from the outset
- Treated as a binding contract for sale
- Can cost the family business relief
Cross option agreement
- Each side holds an option, not an obligation
- Same commercial outcome, optional until exercise
- Generally accepted as preserving business relief
- The usual answer for owner-managed companies
Other routes exist. Automatic accrual passes the interest in the business to the remaining owners without payment, which suits some partnerships. A company share buyback has the company itself buy the shares. A single option agreement, where only one side holds the option, is sometimes used where a shareholder becomes critically ill rather than dies. Which fits depends on your articles of association and your shareholder agreement, and the use of a cross option is the most common answer for owner-managed companies.
Where cross option agreements go wrong
Most failures are not drafting failures. They are maintenance failures.
Signed but never funded
The agreement exists, the insurance policy does not. The surviving shareholders have the option to buy and no money to do it with.
A stale valuation
Cover arranged five years ago against a value of the business that has since doubled. The payout buys a fraction of the shareholding.
A new owner left out
Someone joined the board and was never added as a party. Their shares in the business sit outside the arrangement entirely.
Cover not in trust
The payout lands in the deceased's estate instead of reaching the surviving business owners, delaying everything by months.
Critical illness left out
Life only. A critically ill shareholder who can no longer work has no route to sell the shares and step back.
It contradicts the articles
The agreement says one thing and the company's articles of association say another. Nobody notices until it matters.
We review these arrangements annually, because a protection arrangement that is not reviewed is a protection arrangement that will disappoint someone.
Cross option agreement questions, answered
Do all shareholders have to be party to a cross option agreement?
Normally yes. If one owner is left out, their shareholding is not covered and the business is only partly protected. Every fellow shareholder should sign, and every new one should be added.
Can you get out of a cross option agreement?
The shareholders can agree to vary or end it, in the same way they agreed to enter into an agreement in the first place. What one shareholder cannot do is walk away unilaterally once an option has been exercised.
What happens if a shareholder leaves the company?
An outgoing shareholder should be removed as a party and their cover reviewed. This is usually handled at the same time as the share transfer.
What's the position on critical illness?
Critical illness cover can be added so a critically ill shareholder can sell their interest in the business and step back. Many agreements use a single option here, giving only the ill shareholder the right to require a purchase.
Does the beneficiary of the estate have any say?
The personal representatives act for the beneficiary and hold the put option. They can require the survivors to buy, which protects the family's position as much as the company's.
Who actually drafts the agreement?
A solicitor. We are a mortgage and protection brokerage, so we size and arrange the cover and then work alongside your solicitor so the two documents agree with each other.
Let's get the agreement funded properly
If you already have a cross option agreement, we will check the cover behind it still matches the value of the business. If you do not, we will size the protection and work with your solicitor to get the document drawn up. Thirty minutes, on Zoom, no charge.
Book a 30-min business protection callGeneral information, not a personal recommendation. Tax treatment depends on individual circumstances and may change.