Shareholder and Partner Protection
Written by Check Financial · 4 min read
The short answer
Shareholder and partner protection gives the remaining owners the money to buy a business owner's share if that owner dies or becomes seriously ill. The business stays with the people running it, and the owner's family receives a fair value for the share.
Who It's For
Shareholder and partner protection suits businesses with more than one owner. It is often worth considering when:
- You're a shareholding director in a limited company with other shareholders.
- You're a partner in a partnership or a member of an LLP.
- You wouldn't want a former owner's family, or whoever inherits their share, to have a say in running the business.
- The remaining owners couldn't easily afford to buy the share from their own money.
Without it, the share passes under the owner's will. Their family may want or need to sell it, and the remaining owners may not be able to afford it.
How It Works
- The business is valued, and each owner's share is worked out.
- Each owner takes out a policy on their own life, usually with serious illness cover too, for the value of their share.
- Each policy is written in a business trust for the benefit of the other owners.
- The owners sign an agreement, usually a cross-option agreement drawn up by a solicitor, which gives each side the right to require the sale and purchase of the share.
- If an owner dies or is diagnosed with a covered illness, the policy pays out to the other owners, who use the money to buy the share at its agreed value.
There are other ways to set it up, for example the company buying back the shares. We'll explain the options with your accountant and solicitor.
How Much Cover, What It Costs and Tax
How much cover. Usually the value of each owner's share. The valuation should be reviewed regularly, because the cover may need to change as the business grows.
What it costs. The price depends mainly on each owner's age, health and smoking status, the value of their share, the length of the policy, and whether serious illness cover is included.
Tax. How premiums and payouts are treated depends on how the arrangement is set up. With the usual own-life-in-trust arrangement, the payout is normally free of income tax. The agreement can also affect inheritance tax reliefs on business shares, which is why it should be drawn up by a solicitor. We'll explain the options, and your accountant should confirm the treatment.
What It Doesn't Do
- It doesn't protect the business's profits if someone important is lost. That's key person cover.
- It doesn't work without the agreement. The policy provides the money, but the legal agreement is what makes the sale happen.
- It doesn't automatically keep up with the business's value. Cover needs reviewing as the business grows.
- It doesn't clear business loans. For that, see loan protection.
Real Scenario
Example scenario, not a real client
Keeping the Business with the People Who Run It
Two directors each own half of a growing limited company. Neither could afford to buy the other's shares if one of them died.
Outcome: Each takes out life and serious illness cover for the value of their shares, written in trust for the other, with a cross-option agreement drawn up by their solicitor.
Common Questions
What is a cross-option agreement?+
Who pays the premiums?+
What if the owners are different ages or own different shares?+
Does it work for partnerships and LLPs?+
Is this the same as key person cover?+
Related Guides
Protecting Your Business If the Worst Happens
Business protection explained, key person cover, shareholder protection, relevant life and loan protection. What every business owner should consider.
Read guide →Key Person Cover
Read guide →Loan Protection
Money to repay business loans and debts if a key person or owner dies or becomes seriously ill.
Read guide →This guide is general information, not personal advice. Check Financial Ltd is an appointed representative of Capital Protect Ltd, authorised and regulated by the Financial Conduct Authority.