The surviving business owners have the option to buy the shares of their ill or deceased colleague within six months of the event. The agreement requires the person insured (or their beneficiaries or legal personal representatives) to sell their share of the business to the other business owners if asked to do so.

Similarly, the agreement requires the other business owners to buy out the shares of the person insured if asked to do so by them (or their beneficiaries or legal personal representatives). The remaining business owners use the proceeds of the insurance policy to buy the share. It is not a binding contract for sale so there is no danger of losing inheritance tax (IHT) business property relief, where it applies. (Some types of trade are not eligible for IHT business property relief.)

If new owners join the business and wish to join the arrangement, they should complete a new double option agreement.

Our sample version of this, the illustrative cross option agreement, covers claims for both life only and life with critical illness insurance.

Under this agreement, the critically ill partner or shareholder can ask the remaining business owners to buy the shares if they wish, but the remaining owners cannot insist on the sale.

This option can be combined with a double option agreement covering the life insurance on the partner or shareholder, as in the illustrative cross option agreement. This means you do not need to use a separate form unless you only want the single option agreement. Like the double option agreement it is not a binding contract for sale, so there is no danger of losing IHT business property relief.

The single option part of our illustrative agreement covers critical illness and total permanent disability claims.

Some partnership agreements include a clause that each partner’s share will automatically pass to the other partners on death. This applies particularly in specialist vocation partnerships such as solicitors or dentists, where an interest in the business can only belong to a suitably qualified individual. Therefore, leaving it to a member of the family may not be possible.

To make sure the deceased partner’s family receives payment for the share, each partner has a policy written in trust for their own family to cover the value of their share of the partnership. Under an automatic accrual agreement, for IHT purposes the estate of the deceased business owner is considered to receive the value of the share in cash rather than shares. This can lead to a tax liability.

The partners should consult their legal adviser to have an automatic accrual agreement drawn up. The agreement requires each partner to maintain the insurance to cover the full value of their share of the partnership. If the partner leaves the partnership, the plan can continue for their family’s benefit.

This is a very complex area, and clients should seek professional advice on it. Share purchase must be allowed for in a company’s Articles of Association. If the shares are quoted on a stock exchange or the alternative investments market, the purchase must be approved by the shareholders.

The company can take out a life or life with critical illness insurance to provide funds to buy the shares. The policy normally lasts until the expected retirement date of the life assured, and the company receives the benefits on claim.

As each company’s circumstances are different, whichever route is chosen it is important that the client takes legal advice to ensure the most appropriate arrangement for them.