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Shareholder Protection – CII J03, AF2 and AF5

Shareholder Protection – CII J03, AF2 and AF5

If you are sitting the CII AF2, AF5 or J03 exams, then this post is of particular use to you. It discusses the main point of business protection and what needs to be in place to protect the interests of both the dependants of a shareholder/director who has passed away and also those of the surviving shareholders of a company.

Both the April and October 2014 AF5 fact finds last had some kind of business protection need.  In April it was Keyman so we thought we’d take a look this time round at the main points of shareholder protection.

The main point of business protection is to ensure that the dependants receive cash for the value of the deceased’s share in the business and also that the surviving shareholders retain control of their company.

Business ProtectionThree things need to be put in place:

  • A shareholder agreement to decide on how to transfer the shares
  • Insurance provision so that the funds are available to buy the shares
  • Documentation to ensure that the arrangement is tax efficient

Term Assurance

Term assurance is the cheapest and simplest form of policy to use – either level term, short term or long term, or short term with the option to renew can be used.  Each shareholder/director takes out a life policy on their own life for the amount that covers the value of their shareholding and places it in a trust for the benefit of the other director/shareholders.  The trustees and beneficiaries are usually also the shareholding directors.  When a death occurs the money pays out quickly to the trustees who can then use that money to buy the shares from the deceased’s estate.

Cross Option Agreement

A cross option agreement then needs to be completed – also known as a double option agreement.  In this, the shareholders of the business have an option to buy the shares from the estate of a deceased shareholder, and the estate has an option to sell.  If either side exercises their option, the other has no option but to comply.   There is usually a timescale for the option to be exercised; most agreements state 6 months from date of death although other time periods can be agreed.   The main advantage of using this type of arrangement is that it retains business property relief for IHT purposes as well as ensuring both parties achieve what is best for them.

Type of Trust

The trust used should be a business trust where the trustees have a power of appointment and future changes in the shareholder’s arrangements can be catered for.

You can follow the links below to find our AF2, AF5 and J03 resources:



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